In hunt for dividends, small-caps offer big surprise

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%. 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.