A New Sweet Spot for Dividend-Seekers

It's an unfortunate, and frequent, occurrence in the small-cap investing world: Most of the best-performing funds attract a lot of attention and money, forcing many of them to shut their doors to new business. After all, small-cap funds can't function with a huge asset load. They need a smaller profile to jump into and out of smaller companies without moving the market. Fortunately, one first-rate small-cap-focused fund shop remains largely open for business, and it's making plans to expand its fund lineup into one of the more promising sectors of the market.

Expanding their horizons
Royce & Associates has been honing its skills in the small-cap market for nearly four decades. Its value-oriented investment approach has brought Royce tremendous success over the years, and the company boasts many of the most popular small-cap funds around. Its now-closed Royce Premier (RYPRX) clocks in with more than $6 billion in net assets.

Now, Royce is planning to launch four new funds early this year, all focusing on small-fry dividend-producing stocks: Royce Global Dividend Value, Royce International Premier, Royce International Micro-Cap, and Royce Special Equity Multi-Cap.

With the launch of these funds, dividend-seekers now have an expanded universe from which to invest. Small-cap dividend-producing stocks are a much rarer bird than large-cap candidates. The vast majority of dividend-focused mutual funds or exchange-traded funds lean heavily into large- and megacap territory. For example, the Vanguard Dividend Appreciation ETF (NYSE: VIG  ) focuses on megacap blue chips such as Chevron (NYSE: CVX  ) and McDonald's (NYSE: MCD  ) , both of which sport dividend yields in excess of 3% while trading at P/Es of 11 and 17, respectively, making them prime candidates for value-focused dividend investors. However, since smaller companies are typically less established and financially stable, companies in this space that pay consistent dividends are rare. That means investors could really benefit from Royce's research efforts in the small-cap arena.

A peek inside
While each of Royce's four new funds are likely to vary based on their specific mandate, we may be able to get a clue about what kinds of companies will likely to find their way into the portfolio by looking at Royce's existing dividend offering. Royce Dividend Value (RYDVX) has been around since mid-2004, racking up a pretty solid track record in that time; it bested 93% of all small-cap blend funds over the past five years. The fund is a bit pricey, with a 1.54% expense ratio, but it has managed to get the job done admirably over the years.

Financials play a huge role in this small-cap dividend portfolio, accounting for one-third of fund assets. Here, small-cap names like Federated Investors (NYSE: FII  ) , with its 3.6% dividend yield, and Alliance Bernstein (NYSE: AB  ) live alongside slightly larger mid-cap stocks like asset manager Affiliated Managers Group. Management is partial to small-cap names in the insurance and investment management business like these, because they offer substantial yields while avoiding much of the risk and cloudy outlook that names in the banking industry currently face. The team has long been a fan of Alliance Bernstein, thanks to its diversification, scale, and extensive global reach. Similar to most of the Royce portfolios, Dividend Value also has a hefty allocation to industrial names, which together account for another 23% of assets. Odds are good that the new Royce dividend funds will find a lot to like in these two sectors as well.

Small is beautiful
Of course, if dividends aren't your thing, or you like to stick to larger, more established companies to provide your income, there are still several Royce funds that could fill a role in your overall small-cap allocation. One of my favorites here is Royce Pennsylvania Mutual (PENNX), which looks for financially sound companies going through some kind of setback that leaves them trading at a discount. The fund has been around since 1962, and it ranks in the top 25% of its peer group over the past decade and a half.

Metals and mining stocks have been a huge play for the fund shop in recent years, based in part on management's belief that investors have consistently underestimated the ongoing profitability and dividend income available from some of the better gold-mining companies out there. To that end, Pennsylvania Mutual is heavy in this industry, including names like Agnico-Eagle Mines (NYSE: AEM  ) and Ivanhoe Mines (NYSE: IVN  ) among its largest holdings. This fund has been a consistent and steady performer, and it would make a fine core small-cap holding for any investor.

If dividends are important to you, I would highly recommend keeping an eye out for Royce's four new small-cap dividend funds. Given the relative dearth of dividend funds on the small-cap side of the market cap spectrum, these new offerings could fill an important space in that arena. Dividends will likely continue to be an important part of many Americans' investment programs in the coming years, so it will be nice to have some further diversification available for dividend-seekers of all stripes.

For more winning mutual fund recommendations and time-tested personal financial planning advice, check out the Fool's Rule Your Retirement service. You can start your free 30-day trial today.

Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter. At the time of publication, she did not own any of the funds or companies mentioned herein. Chevron is a Motley Fool Income Investor selection. Federated Investors is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days.

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  • Report this Comment On January 03, 2011, at 6:02 PM, followthediv wrote:

    Thank you Amanda, for pointing out PENNX. Looks like a promising one to follow up on.

    For people more interested in individual stocks, I can recommend taking a look at this NYSE dividend list here: http://www.bounc.es/nyse

    Always handy to keep around.

    Todd

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