Make Money in Small Companies With Big Dividends the Easy Way
Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you're drawn to small-cap companies because of their great growth potential, yet you also yearn for dividend income, the WisdomTree SmallCap Dividend ETF (NYS: DES) , recently yielding around 3.2%, could save you a lot of trouble. Instead of trying to figure out which companies will perform best for you, you can use this ETF to invest in lots of them simultaneously.
The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The WisdomTree ETF's expense ratio -- its annual fee -- is a relatively low 0.38%.
This ETF has performed reasonably, but it's also very young, with just a few years on the books. It outperformed the S&P 500, on average, over the past three years, but as with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
With a low turnover rate of 11%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.
What's in it?
Several small dividend-paying companies had strong performances over the past year. TAL International Group (NYS: TAL) jumped 21%, partly on strong earnings reports. The company, which yields 5.6%, specializes in leasing and trading transportation equipment. Some worry about those in the shipping industry, which is suffering from overcapacity and low rates. Some companies carry high debt and a risk of bankruptcy, but TAL seems healthier than many.
Other companies didn't do as well last year, but could see their fortunes change in the coming years. Prospect Capital (NAS: PSEC) , up 1%, focuses on private equity and mezzanine financing for up-and-coming businesses, and should see its prospects improve as our overall economy does. In the meantime, it offers a yield well above 10%! Like Prospect, Apollo Investment (NAS: AINV) , down 33%, is a "business development company" receiving preferential tax treatment, as real estate investment trusts, or REITs, do. Apollo recently yielded 11% and has disappointed some with negative returns on equity and plans to dilute existing shares via a new offering. But others see it as rather undervalued now, and they welcome its hefty payout.
Government Properties Income Trust (NYS: GOV) , down 5%, is a REIT that has recently yielded 7%. Last year it was one of the highest-rated REITS, with some seeing it as a bit more stable than its peers, as it mainly leases properties to government entities, which are less likely to go out of business or relocate.
The big picture
It's hard to argue against the value of owning small-caps and dividend payers in your portfolio. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
Learn about the 5 ETFs That Could Soar in 2012. And if you're looking for some great investments beyond ETFs, consider these 12 Dividend Stocks for 2012.
At the time thisarticle was published Longtime Fool contributorSelena Maranjian, whom you can follow on Twitter@SelenaMaranjian,holds no position in any company mentioned.Click hereto see her holdings and a short bio. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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