NEW YORK - In the hunt for dividends, biggest doesn't always mean best.
Big, blue-chip stocks are often the first stop for many dividend investors. Companies like Exxon Mobil have long histories of paying dividends and higher yields than the market's average. But smaller companies pay dividends, too, and some mutual-fund managers count them among the best opportunities to find dividend growth.
That's why Don Taylor of the Franklin Rising Dividends fund prefers companies a tier or two below the behemoths. He considers the sweet spot to be firms valued between $20 billion and $50 billion. The average value of companies in the S&P 500 index is $36 billion.
One of the biggest investments in his fund is Roper Industries, an industrial company worth $14 billion. It may not look like a great dividend stock with a yield of 0.6 percent. Taylor has been comfortable with that because Roper has been using its cash to buy rivals to accelerate growth.
But finding acquisitions big enough to make a significant impact is getting tougher. So Taylor expects Roper to steer more of its cash toward its dividend. Earlier this year, Roper hiked its payout by 21 percent.
"These companies are big enough that they're important or leading businesses, but they're not so big that it becomes really difficult to grow," he says.
Some dividend-focused mutual funds focus on even smaller companies. The Principal Small-MidCap Dividend Income fund concentrates on stocks with market values below $7 billion.
Smaller dividend stocks aren't sure things. A big run-up in prices for the smallest stocks means they generally look more expensive. Small-cap stocks can also have sharper declines when markets are rocky.
But adherents say dividend payers among small-cap stocks aren't as expensive as their high-growth peers.
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