Small Dividend Stocks Deliver Hefty Returns

Searching for income, investors have been pouring into exchange-traded funds that hold big dividend-paying stocks. A favorite choice is Vanguard High Dividend Yield ETF (VYM), which yields 2.9%. But you can get more income with two ETFs that invest in smaller stocks: WisdomTree SmallCap Dividend (DES), which yields 3.7%, and WisdomTree MidCap Dividend (DON), with a yield of 3.2%. Besides solid dividends, the WisdomTree funds have also delivered strong total returns. During the past five years, the small-cap fund returned 8.9% annually, compared to 5.5% for the S&P 500 and 7.7% for iShares Russell 2000 ETF (IWM). WisdomTree Midcap returned 9.4% annually, compared to 7.3% for iShares Russell Midcap (IWR).

Not many funds focus on small-cap dividend stocks. Many academic studies have shown that small stocks outdo large ones over the long term. Dividend-paying small stocks do especially well. From the end of 1984 through the first quarter of this year, the dividend-paying members of the Russell 2000 outdid the nondividend payers by 2.6 percentage points annually, says Adam Peck, portfolio manager of Heartland Value Plus (HRTVX), a mutual fund that buys small-cap dividend stocks. Peck says that dividend stocks can be less volatile than nondividend payers. "Dividend payers tend to be more well-established companies with consistent cash flows," he says.

Source: The Street

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