Introducing Chuck Carlson's newest book:
The Little Book of
Now is a great time to be a dividend investor – and Chuck Carlson’s The Little Book of BIG DIVIDENDS (John Wiley & Sons) is the individual investor’s blueprint for successful dividend investing.
In this concise little book, Chuck walks you through the basics of dividend investing, discusses the importance of size and safety of dividends when considering dividend-paying stocks, as well as the ability buy attractive dividend-paying stocks directly via DRIPs and direct-purchase plans. He also provides a simple yet powerful formula for finding what he calls "Big, Safe Dividends" (BSDs), which takes into account factors most critical to the safety and growth potential of a company's dividend and can be used by any investor to find attractive dividend stocks.
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February 17, 2010
Big gains in a small package
Small-capitalization stocks lagged midcaps and large-caps last year. But that doesn’t mean they should take a backseat with investors.
The S&P MidCap 400 Index paced the market’s recovery with a 37.4% advance in 2009, topping the 25.6% gain of the S&P SmallCap 600 Index and 26.5% gain of the S&P 500 Index of large-cap stocks. The S&P 400 MidCap was also the best performer over the last three and five years. However, over the last 10 years, the small-cap and midcap indexes delivered roughly similar returns well above those of the S&P 500. And for longer periods of time, small-caps look even better. From 1926 through 2008, small-cap stocks averaged annual returns of 14.9%, versus 13.4% for midcaps and 10.8% for the largest stocks.
Long-term returns aside, small-cap stocks have appeal for several reasons:
• Small-caps have historically delivered better profit growth than larger stocks, and the next fiscal year should be no exception. The average stock in the S&P SmallCap 600 Index is expected to deliver nearly 22% growth in its next fiscal year, versus 19% for components of the midcap and large-cap indexes. Over the next five years, consensus estimates project annualized profit growth of 13% for the average S&P 600 company, versus 10% for the average S&P 500 component.
• While Quadrix works on stocks of all sizes, it is highly effective for small stocks. Smaller stocks on average earn lower Value scores than large stocks, but identifying small-cap stocks with strong valuations can lead to highly effective results. As a group, small-cap stocks that earn strong Value scores deliver greater outperformance versus peers than any other combination of stock size or Quadrix category. High Overall scorers have also generated particularly impressive outperformance in the small-cap space.
• There are many more small-cap stocks than midcaps or large-caps. Within that huge opportunity set, we can usually find plenty of appealing options.
There is no universally accepted definition of a small-cap stock. For this story, we used a method that splits New York Stock Exchange issues into 10 deciles based on stock-market value, then slots non-NYSE stocks into those deciles. Based on this method, the market capitalization of small-cap stocks falls between $470 million and $1.75 billion. This range changes over time as the market ebbs and flows.
Small-cap stocks have a reputation for high risk, and in fact they can be quite volatile. But over the last 15 years, the S&P 600 Index’s worst price change — down 31% in 2008 — was at least five percentage points better than the weakest years for the S&P 400 and S&P 500 indexes.
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