Dividends4Life: Small And Medium-Cap Dividend Stocks With Low Volatility

Historical evidence from academic research suggests that there is an anomaly related to low-volatility stocks, observed in portfolios of the like securities, which indicates that higher expected rates of returns do not always correspond to higher assumed risk. Stocks with low volatility of returns, perceived as less risky than high-volatility stocks because their returns do not fluctuate dramatically in either direction over short-term periods, have tended to produce higher risk-adjusted returns than their high-volatility peers. An explanation for that out-performance can be found in the tendency of low-volatility stocks to reduce drawdowns during market corrections. (For the reference, volatility is measured as standard deviation or variance of the stocks' daily price returns over a particular period).

In the universe of small and medium-cap dividend stocks, which are generally considered more volatile than the large-cap stocks, there is a number of equities that have low historical volatility of returns. In fact, some of these stocks pay reasonable dividend yields, with a few boasting long histories of consistent dividend growth over time. Two S&P indices track the performance of the small-cap and medium-cap stocks with low volatility of returns. The S&P SmallCap 600 Low Volatility Index measures the performance of the 120 least-volatile stocks in the S&P SmallCap 600, while the S&P MidCap 400 Low Volatility Index measures the performance of the 80 least-volatile stocks in the S&P MidCap 400. There is also a pair of corresponding ETFs from PowerShares that tracks these indices.

Source: Seeking Alpha

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