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In the volatile markets of 2022, dividend-paying companies are seeing a big uptick in interest from advisors and investors seeking total returns for their portfolios. While focus traditionally goes to the large-cap companies that have performed strongly in the last decade, in a changing economic environment, small-cap and the pivot to value could offer both diversification options and outperformance potential for portfolios, according to a recent blog by Lonnie Kimyagarov, associate director of research content at WisdomTree, and Bradley Krom, head of U.S. research at WisdomTree.
When looking at the small-cap space, dividend-paying companies have historically outperformed their non-dividend-paying peers over the last 20 years by an average of 2%. That division has become even more pronounced in 2022, with Russell 2000 Index dividend-payers down -12.65% year-to-date while the Russell 2000 Index non-dividend-paying companies are down -23.53% year-to-date.
“With valuations near all-time lows and a strong dollar potentially weighing on large-cap profitability, we believe now may be the time to increase exposure to small caps, as long as you’re looking through the lens of dividend growth,” the authors wrote.
Small-cap value currently has price-to-earnings ratios that are near the market lows experienced in March 2020, offering great opportunity while diversifying away from large-cap exposures.
For those investors who are worried about earnings quality during a potential recession, the WisdomTree US SmallCap Quality Dividend Growth Fund (DGRS ) offers a smart play within the space that only has 2.5% of the fund exposed to unprofitable companies, as opposed to the broader Russell 2000, which currently has 22% exposure to negative earning companies.
“The median constituent in DGRS has grown its dividends by 8.4% over the last year, nearly double the rate of the S&P 500,” the authors wrote. “Since the Russell Indexes are comprised of a significant number of non-dividend payers, the median issuer is around zero. However, when looking at weighted averages, constituents in DGRS have not only been outpacing small-cap peers but large caps as well.”
DGRS invests in small-cap U.S. equity companies that pay dividends and display growth characteristics and applies a quality and growth screen to securities. The fund seeks to track the WisdomTree U.S. SmallCap Quality Dividend Growth Index, a fundamentally weighted index based on dividend projections for the next year that screens U.S. small-cap companies for long-term earnings growth expectations, return on equity, and return on assets.
DGRS has an expense ratio of 0.38%.
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