How to Grab Big (7%+) Dividends in ... Small Caps?

The article identifies a potential resurgence in small-cap stocks after a decade of underperformance, noting their recent outperformance against large caps. It highlights the Royce Small-Cap Trust (RVT), a closed-end fund, as a strategic vehicle to capture this trend, offering a 7.1% dividend yield by converting small-cap gains into income. RVT, which diversifies across 488 small-cap companies and ties its payout to NAV performance, is currently trading at a 9.2% discount, presenting an opportunity for investors seeking both small-cap exposure and substantial income.

Analysis

A potential cyclical rotation into small-cap equities is underway following a decade of underperformance relative to large caps, as evidenced by the iShares Russell 2000 ETF (IWM) matching or exceeding large-cap performance over the last three months. The primary obstacle for income-focused investors in this segment is the typically low yield, with IWM offering just 1%. The Royce Small-Cap Trust (RVT), a closed-end fund, is presented as a vehicle to circumvent this issue by converting capital appreciation from a portfolio of 488 small-cap stocks into a 7.1% dividend yield. This payout is based on a managed distribution policy of 7% of the fund's average NAV over the last four quarters, providing flexibility while maintaining historical consistency. The strength of RVT's portfolio is supported by the fundamental performance of its key holdings, including IES Holdings' (IESC) 16% revenue growth, SEI Investments' (SEIC) 70% EPS increase, and Assured Guaranty's (AGO) 32% rise in net income. Critically, RVT currently trades at a 9.2% discount to its net asset value, a level that has narrowed from double digits but remains significantly wider than the sub-6% discount observed in January, suggesting potential for capital appreciation from both portfolio performance and discount compression.

Key Decisions for Investors

• Investors looking for tactical exposure to the small-cap recovery while requiring high income should evaluate the Royce Small-Cap Trust (RVT) as a potential holding, given its 7.1% yield structure.
• The current 9.2% discount to NAV on RVT offers a potential dual-return stream from underlying asset appreciation and the narrowing of the discount toward its historical tighter levels.
• Monitor RVT's NAV performance closely, as the fund's managed distribution policy means the dividend payout is variable and directly dependent on the market value of its small-cap portfolio, not a fixed payment.