Small Cap Dividends – Can Small Be Beautiful?

Wednesday, Jun 20 2012 by
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Small Cap Dividends  Can Small Be Beautiful

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…

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BP p.l.c. is an integrated oil and gas company. The Company owns an interest in OJSC Oil Company Rosneft (Rosneft), an oil and gas company. The Company's segments include Upstream, Downstream, Rosneft, and Other businesses and corporate. The Upstream segment is engaged in oil and natural gas exploration, field development and production, as well as midstream transportation, storage and processing. The Downstream segment has global manufacturing and marketing operations. The Rosneft segment has a resource base of hydrocarbons onshore and offshore. The Other businesses and corporate segment comprises the biofuels and wind businesses, shipping and treasury functions, and corporate activities around the world. The Company provides its customers with fuel for transportation, energy for heat and light, lubricants to keep engines moving and the petrochemicals products used to make everyday items as diverse as paints, clothes and packaging. more »

LSE Price
537.1p
Change
-0.3%
Mkt Cap (£m)
109,176
P/E (fwd)
12.3
Yield (fwd)
5.8

Lloyds Banking Group plc is a provider of financial services to individual and business customers in the United Kingdom. The Company's main business activities are retail and commercial banking, general insurance, and long-term savings, protection and investment. The Company's segments are Retail, Commercial Banking, Consumer Finance, Insurance and Other. The Retail segment offers a range of financial service products, including current accounts, savings and mortgages. The Commercial Banking segment offers a range of products and services, such as lending, transactional banking, working capital management, risk management and debt capital markets services. The Consumer Finance segment offers consumer lending products, including motor finance, credit cards, and unsecured personal loans. The Insurance segment provides a range of protection, pension and investment products. Its brands include Lloyds Bank, Halifax, Bank of Scotland, Scottish Widows, Colleys, Lex Autolease and AMC. more »

LSE Price
60p
Change
-0.6%
Mkt Cap (£m)
42,938
P/E (fwd)
7.8
Yield (fwd)
5.9



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1 Comment on this Article show/hide all

djpreston 20th Jun '12 1 of 1
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Thoroughly agree with the auctions of the smaller and mid cap dividend stocks. I'm a major fan of the Unicorn UK Income fund for that very reason. Its got an excellent record, a damned good manager in John Mclure and is an excellent way to diversify income generation.

Fund Management: European Wealth
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