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Small and Mid-Cap funds provide better growth over the long run. Growth and income for early retirees or investors with longer time horizons. Dividend Growth of mid-cap ETF IJH as good as VIG. The fundamentals of Dividend Growth Investing are very appealing: You invest in a number of solid companies with a growing dividend that provide for increased income every year or in an index fund that tracks a dividend index, like SDY or VIG . Many of the companies that are suitable to provide a growing income stream are from the large cap and value segment of the market. The question I am trying to answer is if investors with a longer-term horizon who are not retired yet or maybe early retirees may potentially improve long-term returns without losing too much income by adding some small and mid-cap ETFs without introducing too much extra volatility. Let’s assume a portfolio of 50% Dividend Growth stocks as represented by the Vanguard Dividend Appreciation ETF and 50% evenly split between a small and midcap index ETF. I am using the iShares Core S&P SmallCap ETF (NYSEARCA: IJR ) and the iShares Core S&P MidCap (NYSEARCA: IJH ) for this purpose. VIG tracks the NASDAQ US Dividend Achievers Select Index, which consists of companies that have a record of increasing dividends over time. The current yield is 2.28% and the expense ratio is 0.1. The top 10 holdings are listed below: IJR tracks the S&P SmallCap 600 Index with an expense ratio of 0.12% and yields 1.37%. The top 10 holdings are: IJH tracks the S&P Midcap 400Index with an expense ratio of 0.12% and yields 1.54%. The top 10 holdings are: Comparing the returns for the portfolio consisting of 50% VIG, 25% IJR and 25% IJH to just using a dividend growth approach since 2007 (inception of VIG): Portfolio Initial Balance Final Balance CAGR StDev 50% VIG, 25% IJR and IJH each 10,000 18,908 7.40% 16.06% 100% VIG 10,000 17,571 6.53% 13.87% Period for Jan 2007 to Nov 2015 As expected, the more diversified portfolio had a better growth over the period. Extrapolating these growth rates to 30-year time horizon can make quite a difference: 7.40% growth rate for a 100,000 portfolio for 30 years: $851,390 6.53% growth rate for a 100,000 portfolio for 30 years: $667,049 These numbers are not inflation-adjusted Taking a look at the actual dividends paid definitely shows wide swings for the small cap ETF but the mid-cap ETF IJH seems to be doing even better than VIG for dividend growth. Year IJR Div IJR Div Growth IJH Div IJH Div Growth VIG VIG Div Growth 2015 YTD 1.136526 tbd 1.483874 tbd 1.344 tbd 2014 1.400564 28% 1.942176 12% 1.585 14% 2013 1.09278 -15% 1.727924 19% 1.388 -2% 2012 1.292742 85% 1.451346 30% 1.41 20% 2011 0.69955 15% 1.115373 150% 1.172 58% 2010 0.606336 377% 0.44677 121% 0.742 2009 0.127209 -29% 0.202447 -24% 0 2008 0.178755 0.2657 0.6283 Conclusions: The mix of mid-cap and small-cap stocks improve the long-term performance of a portfolio. For consistent income, I would stick to a mid-cap fund along with dividend growth investing. While the yield is lower for the mid-cap fund, it is not drastically lower than VIG. I used VIG for this analysis since it is tracking the Nasdaq Dividend Achievers index, is very liquid and has a long history. Higher yields plus dividend growth are quite achievable through individual stock investing if you are so inclined or by choosing a higher yielding index fund like SCHD which does not have a very long history yet. Scalper1 News
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