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Index IDEA: Dividends helped smooth the small-cap roller coaster ride in 2018

US small-cap stocks with a track record of strong dividend growth had higher returns and less volatility versus the broad universe of US small-caps in 2018, in line with a similar trend demonstrated over the last decade. And, notably, this outperformance accelerated in fourth quarter during a particularly volatile period for US equities in general and US small-caps in particular.

According to Harnessing the long-term potential of dividend growth, a new report from FTSE Russell, the Russell 2000 Dividend Growth Index had an annualized return of 11.8% from June 1998 through December 2018, versus 7.6% for the Russell 2000® Index. And these returns were achieved amid a respective annualized volatility of 15.1% and 19.6% for the same period. More return for less risk resulted in a significantly higher return/risk ratio of 0.78 for the Russell 2000 Dividend Growth Index.

And, in the fourth quarter of 2018, when the Russell 2000 Index lost 20.2% the Russell 2000 Dividend Growth Index was down just 8%.

Rolf Agather, managing director, North America Applied Research, FTSE Russell:

“FTSE Russell launched the FTSE Dividend Growth Index Series in 2014 as a means for investors to measure the long-term performance of companies that consistently grow their dividends. The indexes target US companies that have successfully raised their dividend payments over 10 years or more while meeting certain liquidity and industry diversification requirements. These indexes have outperformed their parent indexes over time owing to two factors; low volatility and high quality.”

Kieran Kirwan, senior investment strategist, ProShare Advisors, LLC:

“Periods of higher market volatility tend to reinforce the value of finding higher quality companies that continually grow their dividends, particularly in the US small cap asset class as they tend to perform better in times of stress. These companies tend to have stronger balance sheets, more consistent earnings, and resilient business models.”

For more information on the FTSE Dividend Growth Indexes, read the new FTSE Russell research report or visit FTSE Russell.

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