Small Companies: The Undiscovered Investment Opportunity

In the world of investing, big companies have been stealing the show for a while now. But here's the thing: small companies might be the hidden gems we've been overlooking.

Small Companies: The Underdogs

Small companies, or small caps, aren't usually known for big dividends. In fact, the average small-cap exchange-traded fund (ETF) only pays out about 1.1% in dividends. But there's a twist to this story.

The Shift in Investor Behavior

While big tech companies like Apple, Alphabet, and Microsoft have been soaring, small caps have been left behind. This has made small caps a bargain compared to their larger counterparts. And there are signs that this might be about to change.

Investors are starting to look beyond the big names and explore other options. This shift could mean good things for small caps, as they might start to catch up and even outperform large caps.

The Royce Small-Cap Trust: A Star Performer

Now, let's talk about a specific small-cap investment: the Royce Small-Cap Trust. This closed-end fund (CEF) focuses on small companies with strong cash flow growth. And it's been doing pretty well, outperforming the small-cap index by a good margin.

The Dividend Difference

But here's the kicker: while the average small-cap ETF pays out 1.1% in dividends, the Royce Small-Cap Trust pays out a whopping 7.2%. That's a big difference!

The Appeal of CEFs

This high dividend yield is possible because CEFs like Royce Small-Cap Trust pay out as much of their profits as possible as dividends. This makes them an attractive option for investors looking for income, especially in a volatile market like small caps.

The Buying Opportunity

Moreover, the Royce Small-Cap Trust is currently trading at a discount to its net asset value (NAV). This means that the fund's share price is lower than the value of its underlying assets. This discount could present a buying opportunity for investors, as the market might eventually correct this mispricing.

Managing Risk

Investing in small caps can be risky, but pairing the Royce Small-Cap Trust with other investments could help manage that risk. For example, investors could use the income from the Royce Small-Cap Trust to buy other funds when they're oversold, and vice versa. This strategy could help investors secure a large income stream and position themselves for gains without being overexposed to one part of the market.