Big Dividends Available in Small Packages

Halfway through 2022 and some things are abundantly clear in equity markets, including the points that dividend payers and value stocks are displaying durability relative to the broader market.

Regarding dividends, the environment is conducive to embracing payouts as both high dividend and dividend growth strategies are outperforming this year, though the former is legitimately standing out. Add to that, there are other tailwinds for dividend investing, including record levels of payout growth, which are suitable for coping with still low interest and persistently high inflation.

Perhaps not surprisingly, investors are focusing on large-cap dividend payers. For decades, investors have been trained to believe that only big companies deliver dividends. In reality, that’s not the case.

The mid/small-cap dividend opportunity is all the more relevant today because, like large caps, mid-size and smaller stocks are slumping. However, dividend and value fare in the SMID camps are outperforming broader benchmarks in these categories, indicating now could be an ideal time to evaluate smaller dividend payers on behalf of risk-tolerant clients.

Changing Clients’ Mindsets

Dividend payers in the mid- and small-cap arenas are often thought of as hidden gems because clients don’t associate durable payouts with smaller companies.

“Many investors overlook allocating toward dividends outside of large caps. For investors looking to harvest the size and value factor premiums, as well as increase income potential in a challenging inflationary environment for bonds, mid- and small-cap dividends may prove an attractive solution,” notes WisdomTree’s Matt Wagner.

Advisors have data on their side when discussing smaller dividend payers with clients. While many clients aren’t aware of payout opportunities with smaller companies, statistics don’t support that conclusion. In fact, data indicate clients are missing out by solely focusing on large-cap dividend fare, confirming this is an opportunity-rich conversation for advisors.

“While a greater percentage of large-cap companies pay dividends, there is still a significant percentage of mid- and small-cap companies that pay dividends. About 60% of companies in the Russell Midcap Index (500 out of 822) and about 35% of companies in the Russell 2000 Index (725 out of 2,002) pay dividends,” adds Wagner.

More Big Benefits with Smaller Dividend Payers

Focusing on small-cap dividend stocks, there are tangible benefits to considering this asset class, not the least of which are superior earnings quality and reduced volatility relative to broader small-cap benchmarks. Add to that, investors don’t have to make yield sacrifices when embracing smaller dividend payers, but they gain yield advantages over SMID products that aren’t dedicated to dividends.

But wait. There’s more. Focusing on dividend payers in the mid- and small-cap realms often turns up not only more profitable/fewer money-losing companies, but firms that are more likely to be engaged in share buyback programs.

“With lower exposure to unprofitable companies in the small-cap universe, both dividend Indexes have a premium return on equity and return on assets,” concludes Wagner.

Bottom line: SMID dividend payers offer clients more durability and quality than they might expect and that’s a good thing.

Related: Young Generations Have Great Expectations About Wealth