Smaller companies might not be the first thing one thinks of when it comes to dividend distributions. But don't try telling that to Tom Browne, manager of the Keeley Small Cap Dividend Value Fund Ticker:(KSDVX).
From his perspective, if you're going to invest in small-cap stocks, you might as well take the next step and focus on distributions.
“When you look at the data, small-cap dividend-paying stocks have outperformed small-caps in general for the past 16 years,” he said. “They can do it because they tend to get pretty good participation on the upside and they do pretty well on the downside, where you can win by not losing.”
According to Mr. Browne's analysis of companies with market capitalizations of between $200 million and $3.5 billion, dividend payers produced an annualized return of 10.8% from 1996 through June of this year.
That compares to 6.9% for non-payers, and 8.9% for the total small-cap universe, including dividend payers.
The performance is even more impressive when you factor in volatility, as measured by standard deviation, over the same 16-year period.
Small-cap dividend payers had an average standard deviation of 17%, which compares to 26.2% for non-payers and 19.3% for the total universe.
“It boils down to better return with less risk,” Mr. Browne said. “That fact can address one of biggest challenges that advisers are facing, which is keeping investors on their plan during periods of market volatility.”
Mr. Browne has managed the $65 million fund since it was launched in December 2009 by Keeley Asset Management Corp., which manages $4 billion in assets.
Of the more than 2,200 companies in the small-cap range, roughly 900 pay a dividend. “It's not a limited universe,” Mr. Browne said.
The portfolio of about 80 stocks tends to track the benchmark Russell 2000 Value Index in terms of sector weights.
The one exception would be an underweight in the technology sector, which makes up 11.5% of the benchmark but less for the fund, because only 5% of tech stocks pay a dividend.
“The propensity to pay dividends is highest in financials, and almost all [real estate investment trust] pay dividends,” he said.
One of Mr. Browne's favorites from the REIT space is STAG Industrial Inc. Ticker:(STAG), which specializes in buying industrial properties on the secondary market. The company, which went public last year, has a $425 million market cap and has a 6.4% dividend yield. The stock has gained 54.7% from the start of the year. The industrial REIT category as tracked by Morningstar Inc. gained 21.8% over the same period.
The S&P 500 Index is up 16.6% from the start of the year.
Another stock from the portfolio is Meridian Bioscience Inc. Ticker:(VIVO), which Mr. Browne likes for its potential to generate revenue from new products in development.
Meridian has a market cap of $800 million, and pays a 4% dividend. The stock is up 17.7% from the start of the year.
The Keeley fund is up 12.3% from the start of the year, which compares with an 11.6% average gain for the small-cap-blend category as tracked by Morningstar.
Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.