Get an Edge: Look at European Small Caps

equity
gannatti
Head of Research, Europe
04/30/2015

It’s difficult to find an edge when investing. In many cases, it comes down to a single characteristic that has the potential to mitigate an important risk. To that end, we offer up European small caps. The edge we see? Their dividend yields.   How Does Dividend Yield Connect to Total Return? While a higher starting dividend yield can never guarantee a higher total return, it can start things off with a push in the right direction, because:   Total Return = Dividend Growth + Return from Dividend Valuation Changes + Average Dividend Reinvestment RateReturn from Dividend Valuation Changes: This component of the total return would be positive if price levels were to increase at a faster rate than dividend levels—in other words, if the price-to-dividend ratio rose or dividend yield compressed and became lower. The higher starting dividend yield provides cushion and less risk of valuations compressing and detracting from returns.   • Average Dividend Reinvestment Rate: This component of the total return is similar to the average dividend yield over the period—so a higher starting value provides the potential for a higher overall average. It is in these ways that we believe a higher starting dividend yield can give an edge in total returns when compared to a lower dividend yield option.   The WisdomTree Europe Hedged SmallCap Equity Index Delivers the Yield Edge More than three-quarters of euro area small-cap stocks were dividend payers as of March 31, 2015, as compared to only 60% in the U.S1. The WisdomTree Europe Hedged SmallCap Equity Index focuses on this rich hunting ground of euro area small-cap dividend payers, and through its methodology delivers a higher dividend yield than U.S. small caps.   A Higher Dividend Yield Can Come from Weighting by Dividends For definitions of indexes and terms in the chart, please visit our glossary.More than 2x the Dividend Yield: The WisdomTree Europe Hedged SmallCap Equity Index has a dividend yield that was more than twice that of U.S. small caps. As mentioned earlier, this can signal an important potential edge in terms of total return.   • Almost 75% Weight in Stocks with Dividend Yields above 2%: It’s interesting to see how this dividend yield is achieved—clearly weighting by dividends tilts weight toward stocks with higher yields.         1Source: Bloomberg.

Important Risks Related to this Article

Dividends are not guaranteed, and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time. Investments focused in Europe are increasing the impact of events and developments associated with the region, which can adversely affect performance. Investments focusing on certain sectors and/or smaller companies increase their vulnerability to any single economic or regulatory development.

About the Contributor
gannatti
Head of Research, Europe

Christopher Gannatti began at WisdomTree as a Research Analyst in December 2010, working directly with Jeremy Schwartz, CFA®, Director of Research. In January of 2014, he was promoted to Associate Director of Research where he was responsible to lead different groups of analysts and strategists within the broader Research team at WisdomTree. In February of 2018, Christopher was promoted to Head of Research, Europe, where he will be based out of WisdomTree’s London office and will be responsible for the full WisdomTree research effort within the European market, as well as supporting the UCITs platform globally. Christopher came to WisdomTree from Lord Abbett, where he worked for four and a half years as a Regional Consultant. He received his MBA in Quantitative Finance, Accounting, and Economics from NYU’s Stern School of Business in 2010, and he received his bachelor’s degree from Colgate University in Economics in 2006. Christopher is a holder of the Chartered Financial Analyst designation.