Finding Shareholder Rewards In A Small-Cap ETF

January 8, 2018 11:57 am
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Small-cap stocks are not always thought of as prime destinations for shareholder rewards like dividends. Rather, investors often prize smaller stocks for compelling growth prospects. Some exchange traded funds help investors access small caps while bolstering income.

The WisdomTree U.S. SmallCap Quality Dividend Growth Fund (NASDAQ:DGRS) gives investors access to a universe of dividend-paying small-cap stocks. Not only that, but DGRS components are positioned to show consistent growth in their payouts going forward. The index DGRS tracks has a dividend yield of 2.36 percent, above the dividend yields on major U.S. small-cap benchmarks, but not so high as to imply negative dividend actions are imminent. 

Obviously, DGRS is positioned as a dividend ETF, but there is more to the fund's shareholder rewards story, including access to smaller companies that are buying back their own stock.

A Buyback Story

Historical data suggest smaller companies with the ability to repurchase their own shares generate strong returns for investors.

The highest return was found in the smallest companies with net buybacks,” according to WisdomTree research. “While the small cap or 'size'premium has been followed for many years, newer thinking seeks to mix the concept of focusing on small stocks with other factors, such as quality. One avenue … to create a small-cap exposure with high quality is small stocks that are buying back shares.” 

Conversely, small caps that consistently issue new shares, potentially a sign of financial weakness, lag their buyback counterparts.

The index DGRS tracks “focuses on long-term earnings growth, as well as three-year averages of return on equity and return on assets,” according to the issuer.

Increasing Shareholder Yield

The combination of dividends and buybacks sends the shareholder yield on DGRS well above broader small-cap benchmarks. The ETF's trailing 12-month shareholder yield is almost 3.2 percent, compared to just 0.85 percent on the S&P SmallCap 600 Index.

“We would expect the WisdomTree U.S. SmallCap Quality Dividend Growth Index to rival any U.S. small-cap equity index on a shareholder yield basis,” said WisdomTree. “First, it focuses on dividend payers and is weighted by the Dividend Stream, thereby raising the dividend yield portion of the equation.”

DGRS holds nearly 300 stocks, over 49 percent of which hail from the industrial and consumer discretionary sectors.

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