Small Cap ETFs versus Small Cap Stocks

Top Ten Small Cap Investments

There are some decent small-cap focused ETFs. One of them is IJR – iShares Core S&P Small-Cap ETF. IJR has a good expense ratio and good diversification. However, a downside to this type of fund is the lower dividend yield and the larger number of holdings that dilute dividend income. As a retiree, I am more focused on income and am willing to forgo growth in smaller companies. However, IJR has some great metrics, including a ten-year growth history of 187%. Another possibility is the smaller RWJ – Invesco S&P SmallCap 600 Revenue ETF.

Why Individual Small Cap Stocks?

The simple answer is that I want more income and I am willing to sacrifice growth to get the income now. So, for example, BDCs like MAIN and GAIN pay a monthly dividend. The price of the shares is very volatile, but I understand that they are subject to all sorts of news that drives the prices of the shares up and down. The following illustration, from Quicken, shows the allocations of these top ten within the small cap category. These percentages are NOT the percentage of our total invested capital. My favorites, as you can probably see by allocation of funds, are MAIN, GAIN, and CSWC.

Top Ten Small-Cap Investments from QUICKEN

Small Cap Financials Are My Focus

By their very nature, BDCs are financial companies. BDCs (business development company) are companies that invests in small- and medium-sized companies They also invest in distressed, or struggling businesses. A BDC can assist the small- and medium-sized firms grow in the initial stages of their development. For distressed businesses, a BDC brings expertise and funds to help the companies regain sound financial footing. I am comfortable investing in BDCs for income. They have a long history of success and pay some great dividend yields.

Yields From Five

MAIN, GAIN, CSWC, NEWT, and TSLX all sport dividend yields greater than 5%, as the following image shows. In fact, some of them yield more than 10%.

The Five BDCs that are Small-Cap investments

I’m willing to sacrifice growth for a higher dividend, but only if the company is capable of continuing to pay the dividend. Therefore, there are many small-cap BDCs I would avoid. MAIN, for example, pays monthly, has a sensible dividend payout ratio, and sometimes also pays special dividends.

Recently the per-share monthly dividend has been $0.2150 per month, or an expected forward payment of $2.58 per share annually. Furthermore, there have been two special dividends of $0.0750 in February and May of 2022. Prudent investors should not expect special dividends, but they are a nice addition to income when they happen. Buying a quality BDC investment for $37.50 per share that will pay me $2.50 per year is a good income investment in retirement.

Remember the Risk

If the economy goes into a recession, the small cap stocks will likely suffer the most. Some smaller businesses will fail. Therefore, it is important to keep an eye on your investment mix and focus most of your investing dollars on large-cap stocks that pay a growing dividend. But don’t exclude smaller companies from your vision. They have a place and can provide a nice source of income.

Full Disclosure

Cindie and I own shares of all of the small-cap stocks show in the cover illustration.