As we continue to look for alternatives to manage our way through the current uncertainties, we pick up a selection from the Fool's Dan Caplinger. He is looking at dividend bearing equities from smaller companies. Not all U.S. equities behave in the same way and sometimes smaller cap companies give you better value.
It is important to note that generally, in times of stress, investors move to the safety of large cap stocks and so these may be considered too risky. However, they are considered because they provide some diversification, which may be welcomed by some.
Dan's approach to selecting the stocks was to review the WisdomTree SmallCap Dividend ETF (DES) which uses a methodology that weights small-cap companies by their dividend payout. Here are the top stocks with the largest weighting in the ETF:
Trailing Dividend Yield
Weighting in ETF
|Vector Group (VGR)||9.5%||1.44%|
|UIL Holdings (UIL)||5.4%||1.21%|
|Prospect Capital (PSEC)||14.5%||1.06%|
|Medical Properties Trust (MPW)||8.7%||1.02%|
|Solar Capital (SLRC)||12%||0.89%|
|National Health Investors (NHI)||5.6%||0.87%|
Source: WisdomTree; Yahoo! Finance.
This is an interesting filter and we will accept the premise but then measure the returns against a benchmark set of dividend ETFs.
The benchmark ETFs are:
|Asset||Fund in this portfolio|
|REAL ESTATE||ICF (iShares Cohen & Steers Realty Majors,|
|FIXED INCOME||TIP (iShares Barclays TIPS Bond,|
|Emerging Market||VWO (Vanguard Emerging Markets Stock ETF,|
|EQUITY||DVY (iShares Dow Jones Select Dividend Index,|
|EQUITY||VIG (Vanguard Dividend Appreciation ETF,|
|INTERNATIONAL EQUITY||IDV (iShares Dow Jones Intl Select Div Idx,|
|High Yield Bond||HYG (iShares iBoxx $ High Yield Corporate Bd,|
|INTERNATIONAL BONDS||EMB (iShares JPMorgan USD Emerg Markets Bond,|
- Small Stocks Packing Big Dividend Punch -- Total of $10K invested equally in each stock.
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes.
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum.
Portfolio Performance Comparison
|Portfolio/Fund Name||1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Retirement Income ETFs Tactical Asset Allocation Moderate||2%||33%||10%||82%||9%||63%|
|Retirement Income ETFs Strategic Asset Allocation Moderate||-1%||-7%||4%||18%||3%||8%|
|Small Stocks Packing Big Dividend Punch||6%||27%|
Unfortunately, we only have one year's worth of data which is too short to come to any conclusion at this point. We can see that it has demonstrated a precipitous fall in value which is expected as stocks were pummeled and there would be flight to larger cap stocks for their safety. When we emerge from this period of uncertainty, it will be interesting to see whether these stocks rebound.
The dividend story is key in this market to deliver some gains. However, we need more time to assess this selection to see how it behaves under different circumstances.
For now, I'm sticking with the diversified set of ETFs
Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.