Dividend strategies have been popular in recent years as Treasury yields fell from nearly 4% to below 2%. While longer-term performance of dividend strategies generally has been strong, more recent performance has been softer, leading many to wonder what lies ahead. Concerns over slowing global growth, uncertain economic forecasts as well as a changing interest rate environment may likely keep volatility levels higher than what we've seen over the last few years.
But not all dividend strategies are created equal. Those focused on dividend growth, particularly outside the traditional domestic large-cap space, have delivered strong performance in an otherwise challenging environment.
Finding Dividend Growth Opportunities Across Your Portfolio
Although not an obvious choice for dividend investors, dividend growth strategies in the mid-cap and small-cap space have shown strong potential. Since their inception, the Russell 2000 Dividend Growers Index and the S&P MidCap 400 Dividend Aristocrats Index, which focus on companies with the longest track records of year-over-year dividend growth, have outperformed the broader market with lower levels of volatility.
Dividend Growers Outperformed the Broader Market—With Less Volatility
Small-Cap: November 11, 2014 – January 31, 2016
(Source: Bloomberg. Start date is as of Russell 2000 Dividend Growers Index inception. Past performance does not guarantee future results. Index returns are for illustrative purposes only.)
Mid-Cap: January 5, 2015 – January 31, 2016
(Source: Bloomberg. Start date is as of S&P MidCap 400 Dividend Aristocrats Index inception. Past performance does not guarantee future results. Index returns are for illustrative purposes only.)
Why Quality Matters
Mid-cap and small-cap investing is a core strategy for many—for diversification and potentially higher returns. But these higher returns come with higher risk—usually. What sets dividend growth strategies apart is quality. Higher-quality companies tend to have stronger balance sheets and a potentially greater ability to withstand stormy market environments. Our analysis shows that the S&P MidCap 400 Dividend Aristocrats Index and the Russell 2000 Dividend Growth Index have a higher return on equity (ROE) than the broader market, indicating higher quality. Focusing on higher-quality companies may be a sensible strategy in current market conditions, since quality has tended to outperform in periods of heightened volatility.
Dividend Growers Offered Higher Quality
(A widely used metric to define quality, return on equity (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 potential return to investors. Source: FactSet. ROE is based on the 5-year average for the period ending 12/31/2015. Index returns are for illustrative purposes only.)
Takeaway The investment case for dividend growth strategies remains compelling amid a challenging equity backdrop. By looking outside large caps, investors can find mid-cap and small-cap dividend growth strategies that have delivered strong performance. The key is quality: companies that consistently grow their dividends have a high-quality profile and offer the potential to outperform.
Diversification may not protect against market loss. This information is not meant to be investment advice. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Investing involves risk, including the possible loss of principal. Carefully consider the investment objectives, risks, charges and expenses of ProShares before investing. This and other information can be found in their summary and full prospectuses. Read them carefully before investing. Obtain them from your financial advisor or broker-dealer representative, or visit ProShares.com. The "S&P MidCap 400® Dividend Aristocrats Index" and "S&P MidCap 400®" are products of S&P Dow Jones Indices LLC and its affiliates. The "Russell 2000® Dividend Growth Index," "Russell 2000® Index" and "Russell®" are trademarks of Russell Investment Group. All have been licensed for use by ProShares. " S&P®" is a registered trademark of Standard & Poor's Financial Services LLC (" S&P") and "Dow Jones®" is a registered trademark of Dow Jones Trademark Holdings LLC (" Dow Jones") and have been licensed for use by S&P Dow Jones Indices LLC and its affiliates. ProShares have not been passed on by these entities and their affiliates as to their legality or suitability. ProShares based on these indexes are not sponsored, endorsed, sold or promoted by these entities and their affiliates, and they make no representation regarding the advisability of investing in ProShares. THESE ENTITIES AND THEIR AFFILIATES MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO PROSHARES. ProShares are distributed by SEI Investments Distribution Co., which is not affiliated with the funds' advisor.
