Dividend-Paying Small Caps: Grab Growth and Income

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some dividend-paying small-cap stocks to your portfolio but don't have the time or expertise to hand-pick a few, the WisdomTree U.S. SmallCap Dividend Growth Fund (NASDAQ: DGRS  ) 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 relatively low 0.38%. The fund is tiny, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF was created this year and is far too new  to offer a sufficient performance record to assess. And besides, as with most investments, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why dividend-paying small-cap stocks?
It's smart to include smaller companies in your portfolio, as the best of them can grow rapidly and eventually become large caps. Meanwhile, the power of dividends is often underappreciated and worth putting to work in your portfolio. Dividend payers can be powerful portfolio-supporters, providing income even during market downturns. Consider parking them in an IRA, too, to postpone or avoid taxes on dividends.

More than a handful of dividend-paying small-cap companies had strong performances over the past year. Questcor Pharmaceuticals (NASDAQ: QCOR  ) , for example, more than tripled, and it recently yielded 1.8%. (Its dividend was hiked by 25% earlier this year.) The stock gained more than 30% after the company posted solid second-quarter earnings featuring earnings up 72% over year-ago levels and revenue up 64%. Questcor is largely known for its multiple-sclerosis drug, Acthar, which has sold well in the past and is being evaluated for many more indications, such as in pulmonology. Some criticize Questcor for being too centered on Acthar, but it's doing a lot with the drug and has been performing quite well. Even with Questcor's rise in valuation, the stock looks attractive.

Cooper Tire & Rubber (NYSE: CTB  ) surged 62%, in large part because the company was acquired by India-based Apollo Tyres, which may end up closing production plants in the U.S. and selling its more inexpensively produced tires in the U.S. through Cooper's distribution network. Cooper shareholders recently approved the $2.2 billion purchase. Cooper, meanwhile, is expanding, having announced  a new sales office in Moscow in September.

TAL International (NYSE: TAL  ) , a container-leasing company, has gained 47% and yields a hefty 5.8%. The stock looks attractive with its forward P/E ratio near 10, but it carries significant debt, and its free cash flow has been negative in recent years. In its recent quarterly report, management noted that it took advantage of low interest rates to refinance debt. It's growing relatively briskly, with double-digit revenue and earnings growth rates, and its utilization rate is well above 95%, meaning that most of its containers are in use.

Other companies didn't do quite so well over the last year but could see their fortunes change in the coming years. Titan International (NYSE: TWI  ) , a specialist in wheels, tires, and undercarriage systems, sank 19% in large part because the company posted a series of disappointing quarters. (Revenue has been growing at double-digit rates over the past few years, though.) Its dividend yield, at 0.10%, leaves much to be desired. Still, its stock has fallen far enough now, with a forward P/E near nine, to represent an opportunity to some investors.

The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in it, and profiting from it, that much easier.


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