In the search for strong, reliable dividends, investors usually turn to the robust yields and comforting track records of the market’s largest companies – but an increasing number are beginning to look further afield for income.
With around seven blue chip stocks accounting for around 50 percent of dividend payouts (and the top 15 payers representing more than 80 percent of dividends), it would be fair to say that small cap stocks are not a familiar hunting ground for income seekers. However, not only is there evidence of increasing interest in small cap dividends from institutional funds, but research suggests that when it comes to total returns, these mythical beasts can outperform the market, too.
Small Cap Divi Stocks Beat the Market, Too
In the US, market-watchers have long promoted the virtues of looking down the value curve for income – although, for accuracy, the definition of ‘small cap’ can vary wildly between the US and Europe (in the US, the small cap range spans $100m - $2.5bn). Nevertheless, research from US fund manager Royce & Associates, claims that small caps are an ideal source of income and a potential key to long-term outperformance. The argument goes that while small caps offer more exciting long-term prospects they are also dogged by downside volatility. The addition of a dividend however, introduces an element of protection and evidence of astute financial management that should act as a buffer against that volatility.
Royce’s research, which stripped down the Russell 2000 index of small-cap shares into dividend payers and non-payers, found that over 19 years to 2011, dividend payers delivered a total return of 10.1 percent while non-payers delivered 6.2 percent (the index itself returned 8.0 percent). In many respects, these finding chime with a general view that dividend stocks can produce superior total returns to non-payers over the long-term.
Dividend Diversification
In the UK there are potentially even more reasons to consider small cap dividend stocks in an investment portfolio – not least because of the thorny topic of diversification.
As already mentioned, a handful of FTSE 100 companies routinely pay the best dividends in the market. If the renowned Dogs of the Dow (and Dividend Dogs of the FTSE 100) strategies focused on dividend payouts rather than dividend yield (which takes share price into consideration) then there would be…
