Total Return: Managing Risk by Investing in Dividend-Paying Stocks

Small-cap is an asset class that has historically been associated with increased volatility. We have always believed that dividends, plentiful in the small-cap space, can help mitigate some of that risk. But what are we looking for in the dividend-paying companies in which we invest? Portfolio Manager Jay Kaplanand Co-CIO Francis Gannon discuss. Francis Gannon: How should investors think about Royce Total Return Fund? Jay Kaplan: The name is really important. The Total Return Fund really is about total return—it seeks to provide a lower-risk strategy within the small-cap space. We're looking to find really high quality, mostly dividend-paying companies that can also grow over time. We think that when you get some cash back along the way, it helps to take out some of the volatility that's generally associated with small-cap investing.

There'd probably be a little pressure on some dividend-paying smaller companies if rates went up, but there are some different classes of dividend-paying companies, and maybe it's a good time to explain a little bit more about how we approach Royce Total Return Fund. Many funds that talk about dividends are out trying to chase the highest yields they can find. We don't do that. If we were going to do that, our portfolio would be loaded with REITs, MLPs, and Utilities. And, in fact, it's not—mostly because those companies are highly leveraged and we try not to invest in highly levered companies. For us, dividends are important. But it's not high dividends—it's the ability to pay dividends, the ability to pay dividends through cash flow, the ability sometimes to grow dividends over time.

Source: Guru Focus

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