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Index IDEA: Dividend stocks and rising interest rates examined

Dividend-oriented US small cap stocks as reflected by the Russell 2000® Dividend Growth Index have risen in two of the last three periods of extended US interest rate increases by the Federal Open Market Committee (FOMC).

  • For the US Fed tightening period beginning July 1, 2004, the Index fell 3.1% in the first month, then rose 14% for six months and 17.7% for a year.
  • And, again for the current period of interest rate rises beginning in December 2015 through March 23, 2017 the Index was down 3.2% for the first month, then rose 8.3% for six months and 25.3% for one year.
  • An exception to this trend is the period beginning July 1, 1999 through May 31, 2000, when the Russell 2000 Dividend Growth Index was flat for the first month, then fell 9.1% for six months and 11.2% for a year.

Kieran Kirwan, CAIA, Director, Investment Strategy, ProShares, said:

“Index data demonstrates that dividend growth stocks have the potential to perform well regardless of the direction of interest rates. Small cap dividend growth stocks produced positive returns in the 6-month and 1-year periods following two of the most recent three periods in which the Fed has hiked rates. In fact, small cap dividend growth stocks outperformed small, and large cap stocks in general over the same periods. Companies that continually grow their dividends can be a sign of higher quality, having stronger balance sheets with less leverage, and being guided by shareholder-friendly management teams.” 

Catherine Yoshimoto, senior index product manager, FTSE Russell, said:

“Innovative new approaches to traditional market capitalization-weighted indexes, commonly referred to as ‘smart beta,’ help market participants segment the market in different ways for deeper analysis and more discreet exposures through the index. For example, the Russell 2000 Dividend Growth Index provides exposure to companies in the Russell 2000 Index that have increased their dividend payments every year for at least 10 consecutive years and uses an equal weighting methodology to ensure no single constituent or group of constituents dominates the index.”

See more research on the Russell 2000 Dividend Growth Index.

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