These Small, Unloved Companies Are The Next Big Dividend Plays

Small-cap equities are demonstrating renewed momentum, recently matching or exceeding large-cap performance after a decade of underperformance. For investors seeking income from this segment, the Royce Small-Cap Trust (RVT), a closed-end fund, offers a 7.1% dividend yield by converting small-cap gains into payouts, with its distribution policy linked to 7% of its average net asset value. Currently trading at a 9.2% discount to NAV, RVT presents a mechanism to capture potential small-cap growth with a substantial income stream and upside from discount narrowing.

Analysis

A bullish case is being made for small-cap equities, which, after a decade of underperformance, are now demonstrating momentum that matches or exceeds large-cap stocks, as measured by the iShares Russell 2000 ETF (IWM). The thesis posits that small-caps' domestic focus positions them to benefit from US economic strength while hedging against global uncertainties. To address the typically low dividends in this asset class, the analysis centers on the Royce Small-Cap Trust (RVT), a closed-end fund (CEF) offering a 7.1% dividend yield. This payout is generated by converting capital gains from its portfolio of 488 small-cap stocks into distributions. The fund's NAV growth is supported by strong fundamentals in its holdings, such as IES Holdings' (IESC) 16% revenue growth and SEI Investments' (SEIC) 70% EPS increase. A key component of the investment thesis is RVT's current valuation, trading at a 9.2% discount to its Net Asset Value (NAV). This discount, which has narrowed from recent double-digit levels and was previously below 6%, presents an additional opportunity for capital appreciation as it potentially converges toward its historical average.

Key Decisions for Investors

• Investors seeking to capitalize on the renewed momentum in small-cap equities could consider the Royce Small-Cap Trust (RVT) as it offers exposure to the segment's growth potential alongside a significant 7.1% distribution yield.
• The current 9.2% discount to NAV on RVT presents a specific value catalyst; monitor this spread, as its narrowing toward historical levels could generate capital gains in addition to the performance of the underlying portfolio.
• Acknowledge that RVT's dividend is variable, as its policy is to pay out 7% of the rolling average NAV, meaning income distributions will fluctuate directly with the market performance of its small-cap holdings.
• Following the article's guidance, a strategy of gradually building a position in RVT may be a prudent approach to manage entry risk and mitigate the inherent volatility of the small-cap asset class.