Why OUSM Is A Good Way To Play It Safe With Small-Cap Dividends

Some interesting scenarios are afoot late in 2020, including small-cap stocks establishing lead roles; increasingly optimistic outlooks for dividends in 2021; and inklings that value stocks are on the mend.

What Happened: Put that trio of situations together and it's reasonable to expect that investors are renewing their enthusiasm for small-cap value exchange traded funds, which usually offer higher dividend yields than equivalent growth ETFs.

The Russell 2000 Value Index is higher by a stellar 17.73% over the last month, but investors looking for income with small caps may do well to consider quality over value.

Enter the OShares U.S. Small-Cap Quality Dividend ETF OUSM.

Why It's Important: OUSM yields 2.05%, which is decent among small-cap ETFs. The $121.1-million OUSM tracks the O’Shares U.S. Small-Cap Quality Dividend Index.

That benchmark “is designed to reflect the performance of publicly-listed small-capitalization dividend-paying issuers in the United States that meet certain market capitalization, liquidity, high quality, low volatility and dividend yield thresholds,” according to O'Shares.

For decades, the broad consensus on small caps was that the asset class wasn't a viable dividend destination, but that started to change for the better. That failed to insulate the group from a spate of payout cuts and suspensions earlier this year on par with — or worse than — the S&P 500.

That negativity was actually an opportunity for OUSM to shine and, upon closer examination, it did, particularly when measured against small-cap value ETFs.

What's Next: On a year-over-year basis, 84% of OUSM components boosted payouts compared to just 49% in the Russell 2000 Value Index. Conversely, just 7% of OUSM member firms cut dividends versus 32% in the Russell 2000 Value Index.

At the sector level, communication services, consumer discretionary, energy, industrials and real estate are this year's worst dividend offenders.

Those sectors combine for 37% of OUSM's roster, well below the 45% the Russell 2000 Value Index allocates to those groups. In fact, OUSM holds no energy or real estate stocks, while the aforementioned rival benchmark devotes 13% to those groups.