For years, small-cap stocks weren’t associated with dividends, let alone quality, rising payouts. But that narrative is changing for the better. However, investors need to be judicious about the ETFs they deploy to access that theme. That’s because some broad-based small-cap ETFs are loaded with shares of companies that don’t pay dividends and are unlikely to so anytime soon. For investors wanting reliable small-cap payouts, the WisdomTree US Smallcap Quality Dividend Growth Fund (DGRS ) stands out from the crowd.
DGRS is more than 10 years old, confirming the ETF has earned its stripes across a variety of market climates. Those climates include those that have been less-than-hospitable to small-cap investing. The past two years certainly fit the bill as a trying time for small-cap stocks. Over that period, the Russell 2000 Index is in the red while the S&P SmallCap 600 Index is barely higher. But DGRS soundly outperformed those gauges while delivering noticeably less annualized volatility.
Dividend ETF DGRS Could Shine in 2024
With small-cap stocks leading the broader market higher off the October lows, there’s optimism the asset class could take on a more pronounced leadership role in 2024. That would be compelling. and likely signal a broader return of risk appetite. It’d also be a scenario in which DGRS could shine because data indicates that small-cap payouts are increasing, but the group might not be getting adequate credit for that trend.
“Yet this reward is completely absent in small-cap markets. Russell 2000 dividends grew 41% over the past three years, yet the index is virtually flat since then,” noted WisdomTree’s Bryan Manby. “This fundamental disconnect signals small-cap equities are getting nominally cheaper despite significant improvements in a key driver of returns.”
DGRS offers another advantage. As noted above, it’s delivered significantly less annualized volatility than rival small-cap gauges. Some of that perk is attributable to reduced exposure to smaller healthcare and tech stocks. While those sectors often offer impressive rates of growth in the small-cap arena, many smaller firms in those sectors are not profitable, indicating dividends are a long way off.
DGRS’ underlying index “delivers slightly greater style diversification than the value-oriented indexes discussed earlier. Though it remains under-weight in small-cap growth heavyweights in Health Care and Informational Technology, the emphasis on high-quality, dividend-paying companies opens it up more to the Consumer Staples and Discretionary sectors. It also trims its exposure to Financials and Utilities, two sectors that are more prominent in value indexes,” concluded Manby.
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