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Small Dividend Stocks Deliver Hefty Returns

To construct the benchmarks for its dividend funds, WisdomTree starts with all the dividend payers in the categories. The stocks are weighted according to the total dividends they pay.

If a company pays out 1% of all dividends in a group, then that is its approximate weighting in a fund. Big holdings in the mid-cap ETF include H&R Block (HRB) and money transfer company Western Union (WU).

WisdomTree's system of weighting by dividends is very different from the traditional market capitalization approach used by Russell and most other major benchmarks. In the traditional system, stocks with the biggest market values account for the greatest weighting. As a result, the benchmarks tend to put more emphasis on popular growth stocks that don't necessarily pay dividends. In contrast, the WisdomTree dividend system emphasizes high-yield stocks.

The two WisdomTree dividend portfolios may offer a way for income investors to diversify blue-chip portfolios. For starters, the smaller WisdomTree stocks don't always move in lockstep with the S&P 500.

In addition, the WisdomTree funds emphasize different sectors than many market-cap weighted portfolios do. While the Vanguard High Dividend ETF has 32% of assets in health and consumer defensive stocks, WisdomTree SmallCap has only 10% in those sectors. Instead, WisdomTree has an overweight in industrials and consumer cyclicals.

Schwartz argues that diversification could be particularly important for traditional dividend investors in the current market. In recent months, many blue-chip dividend payers have enjoyed big runs as investors have sought income. Now prices of many consumer staples and health stocks appear rich. By adding some smaller stocks to a dividend portfolio, investors may protect against a correction.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
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