In hunt for dividends, small-caps offer big surprise
Plenty of less sizable businesses make substantial payouts to shareholders, says Heartland fund manager
Pairing dividends with smaller companies can provide the best of both worlds, particularly at a time when income is hard to come by, according to Adam Peck, manager of the Heartland Value Plus Fund Ticker:(HRVIX).
Mr. Peck, who co-manages the $2.5 billion fund with Brad Evans, pointed out that since 1984, dividend payers within the Russell 2000 Index have outperformed non-dividend-payers by 2.6% annually.
The outperformance, he explained, is most prevalent when stock prices are falling.
During that 26-year period, the Russell 2000 had nine negative years, and during those negative years, the dividend payers outpaced the nonpayers by an average of 8.1%. “We’re looking at getting more return with less risk by investing in dividend-paying small-cap stocks,” Mr. Peck said.
The relatively concentrated portfolio of less than 70 stocks has a target market capitalization range of between $250 million and $4 billion. The fund’s current average market cap is $1.25 billion.
The strategy is clearly dividend-focused but maintains the flexibility to have about 15% of the portfolio allocated to non-dividend-paying assets.
“We certainly are more interested in companies that have a history of raising dividends,” Mr. Peck said. “But we’re also looking for improving fundamentals and a catalyst to help us avoid the value trap.”
Despite the general perception that dividends are more common in the large-cap space, Mr. Peck said more than half the stocks in the Russell 2000 Value Index pay a dividend, and “there are about 800 companies that fall within our hunting grounds.”
One of those companies is chlorine producer Olin Corp. Ticker:(OLN). The $1.7 billion market cap stock is paying a 3.7% dividend yield.
The fund, which has a four-star rating from Morningstar Inc., has gained 8.2% from the start of the year. Over the same period, the Morningstar small-cap value category is up 10.4% and the S&P 500 is up 11.8%.
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