DIVIDEND GROWTH INVESTING
Why dividend growth in small caps?
Hint: It’s all about quality
Managing the risk in small caps with a dividend growth strategy
How can investors exploit the return potential of small
caps without the punishing drawdowns and volatility?
The answer may be found in a dividend strategy. In
recent years, companies that paid dividends have
outperformed those that didn’t. But bear in mind, not
all dividend strategies are equal. As a group, companies
that have grown their dividends have outperformed
the other dividend payers—by a wide margin.2 This
simple but powerful investing principle applies not only
to U.S. large cap equities, where it is already widely
embraced, but to other areas of the equity markets, like
international developed markets. It also applies to U.S.
small caps.
Going beyond large caps
In today’s yield-starved environment, income investors
are turning to dividend-paying equities to boost the
income streams fixed income investments usually
provide. But dividend strategies are traditionally
expressed—knowingly or unknowingly—through the lens
of U.S. large cap equities. There are roughly twice as
many dividend-paying stocks in the large cap space
as in the small cap space. And most dividend-themed
products in the marketplace focus on large caps.
Small cap investing is a core strategy for many—for
diversification and potentially higher returns. Indeed,
since 1926, small cap stocks have outperformed
large caps on a nominal basis by approximately
200 basis points annualized.1 The only downside is that
the higher returns have come with greater risk.
1
2
Source: Morningstar
Source: Ned Davis Research
Small cap dividend growers generated greater returns with less volatility
January 31, 1987—December 31, 2014
Dividend
Cutters
Dividend
Non-Payers
Dividend
Payers
Dividend
Growers
Annualized
Returns
5.7%
7.0%
12.2%
14.8%
Annualized
Volatility
23.7%
25.3%
17.0%
15.4%
Hypothetical growth of $1,000
$5,000
Dividend Growers
Dividend Payers
Dividend Non-Payers
Dividend Cutters
$4,000
$3,000
$2,000
$1,000
14
20
11
20
08
20
05
20
20
02
99
19
96
19
93
19
90
19
19
87
$0
Source: Ned Davis Research analysis of companies underlying the Russell 2000 Index, a measure of the U.S. small cap equity market. Data is from January 31, 1987 through December 31, 2014. Past
performance does not guarantee future results. “Annualized Volatility” refers to standard deviation, a statistical measure that captures the variations from the mean of a stock’s returns and that is often used
to quantify risk over a specific time period. The higher the volatility, the more the returns fluctuate over time.
What’s behind the performance? Quality
Much of the potential return differential small cap dividend
growers have over other small caps can be attributed
to lower historical risk. Not only have small cap dividend
growers had lower volatility compared with the overall
small cap space, they also have had lower drawdowns. It
is “winning by not losing as much” that has translated to
better returns over time. When looking at the attributes
of small cap companies that have grown their dividends,
it becomes clear: You can get higher quality companies
without giving up their growth potential.
How does one define quality? One widely used measure
is return on equity (ROE). ROE shows how profitable
a company is by comparing net income to average
shareholders’ equity. The higher the ROE, the more
efficient management is in using its equity base and the
greater the return to investors. As shown below, small cap
companies that grew dividends delivered higher ROE than
other small caps, and they did so without sacrificing growth.
Small cap dividend growers delivered higher return on equity...
without sacrificing the growth
Return On Equity
EPS Growth
13.40%
The takeaway
The benefits of a dividend strategy don’t apply
exclusively to U.S. large cap stocks.
• Applying the concept of dividend growth to
small caps can potentially deliver the strong
performance of small cap investing with lower
levels of risk.
• The key is quality. Companies that grow their
dividends have a stronger quality profile—earnings
and balance sheet—without sacrificing the growth
that makes small caps so compelling.
Bottom line: A risk-measured small cap dividend
growth strategy may be well timed for today’s
market environment of high stock valuations and
low bond yields.
Invest in small cap stocks with the best records
of dividend growth.
SMDV ProShares Russell 2000
Dividend Growers ETF
9.80%
Russell 2000
Russell 2000
Dividend Growers
6.00%
6.20%
Russell 2000
Russell 2000
Dividend Growers
Source: Russell Investment Group. Return on Equity (ROE) is based on the 5-year average for the
period ending 12/31/2014. Earnings per share (EPS) is the portion of a company’s profit allocated
to each outstanding share of common stock; it serves as an indicator of a company’s profitability.
Here, EPS is calculated for the last 10 years ending 12/31/2014.
Find out more
Visit ProShares.com or consult your financial advisor.
This information is not meant to be investment advice.
Investing involves risk, including the possible loss of principal. This ProShares ETF is diversified and entails certain risks, including imperfect benchmark
correlation and market price variance, that may decrease performance. Investments in smaller companies typically exhibit higher volatility. Smaller
company stocks also may trade at greater spreads or lower trading volumes, and may be less liquid than stocks of larger companies. Please see summary
and full prospectuses for a more complete description of risks. There is no guarantee any ProShares ETF will achieve its performance objective.
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found in their summary and full prospectuses. Read them carefully before investing. Obtain them from your financial advisor or broker/dealer
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ProShares are distributed by SEI Investments Distribution Co., which is not affiliated with the funds’ advisor. © 2015 PSA 2015-1548