Small Companies, Big Dividends

Small Companies, Big Dividends

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some small dividend-paying stocks to your portfolio but don't have the time or expertise to hand-pick a few, the WisdomTree SmallCap Dividend ETF could save you a lot of trouble. Instead of trying to figure out which companies will perform best, 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 rather low 0.38%. It recently yielded more than 3%.

This ETF has performed well, beating the S&P 500 over the past three and five years. 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.

Why small caps?
It's smart to include smaller companies in your portfolio, as the best of them can grow rapidly and eventually become large caps. And if you find small companies paying dividends, all the better, as they can be powerful portfolio supporters, providing income even during market downturns. The power of dividend investing is often underappreciated.

More than a handful of small dividend-paying companies had strong performances over the past year. B&G Foods surged 35% and recently yielded 3.4%. The company has faced rising food costs in recent years and has also been a savvy acquirer. (A recent buy is Pirate Brands, maker of Pirate's Booty snacks.) Its brands include Ortega, Mrs. Dash, Cream of Wheat, Underwood, Molly McButter, Baker's Joy, and Static Guard. There's some worry, though, about how well it can grow organically, without relying on acquisitions. B&G has carried significant debt, but it has refinanced and reduced that.

PDL BioPharma gained 28%, collecting royalties from a slew of medications. Its dividend yield was recently a hefty 7.6%, but investors are right to worry about its sustainability, since many of the company's revenue streams will dry up in coming years, as patents expire. Management has been seeking other revenue-generating assets and may find a new business strategy in making loans to other medical companies.

Commercial printer R.R. Donnelley , also up 28%, yields 7.3%. It sells labels, packaging, and more to the private and public sector and prints many thousands of forms for the SEC, too. Donnelley bought Edgar Online last year. Some have worried about the company's debt load, though it is free-cash-flow positive. (But it has posted net losses in recent years, too.) The company needs to do more digital business to succeed, which explains a recent eBook deal with Harlequin.

Other companies didn't do as well last year but could see their fortunes change in the coming years. Questcor Pharmaceuticals , for example, sank 17% and recently yielded 2.1%. It's largely known for its multiple-sclerosis (MS) drug, Acthar, that has sold well in the past, and is being evaluated for many more indications. Questcor's management is extremely well regarded, and its dividend was increased by 25% earlier this year. The stock has been heavily shorted, but short interest is shrinking, and some see it as a bargain. Questcor has bought the not-yet-approved-in-the-U.S. immune drug, Synacthen, a possible rival product, from Novartis.

The big picture
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.

If you're looking for promising companies with sizable dividends, don't stop here. The Motley Fool has compiled a special free report outlining nine top dependable dividend-paying stocks. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost -- just click here.

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Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Novartis. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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