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Small Cap Stocks Offer Higher Yield for Income-Focused Investors
ByAinvest
Thursday, Jul 17, 2025 12:57 am ET1min read
Small-cap stocks have historically outperformed large caps, offering a size premium. Additionally, small caps may provide a higher yield for income-focused investors compared to large caps. This yield pick-up is due to the lower market capitalization of small caps, which may limit the number of shares that can be shorted and sold as a hedge against the underlying stock, resulting in higher option prices and thus higher yields for investors.
Small-cap stocks have long been recognized for their potential to outperform larger-cap stocks, offering investors a size premium. Additionally, these smaller companies often provide a higher yield for income-focused investors. This yield pickup is attributed to the lower market capitalization of small-cap stocks, which can limit the number of shares that can be shorted or sold as a hedge against the underlying stock, resulting in higher option prices and thus higher yields for investors [1].A key factor contributing to the higher yields is the lower market capitalization of small-cap stocks. This characteristic can make it more challenging for large investors to short these stocks or sell them as a hedge, thereby driving up the price of options. Consequently, investors in small-cap stocks may benefit from a higher yield as a result of this dynamic [1].
However, it is essential to note that investing in small-cap stocks also comes with increased risks. These companies often lack the scale and staying power of their larger competitors, which can lead to higher downside risk. Additionally, small-cap stocks may have limited Wall Street coverage, making it more difficult for investors to gather comprehensive information about the companies [1].
In conclusion, small-cap stocks offer investors a size premium and potentially higher yields due to their lower market capitalization. However, these benefits come with increased risks, and investors should carefully consider the potential downsides before making investment decisions. By understanding the dynamics of small-cap stocks, investors can make more informed choices and potentially enhance their portfolios' income potential.
References:
[1] https://finance.yahoo.com/news/3-small-cap-stocks-open-043402781.html
[2] https://247wallst.com/investing/2025/07/15/can-broadcom-hit-a-2-trillion-market-cap-by-2027/
[3] https://www.fool.com/investing/2025/07/16/3-high-yield-dividend-stocks-buy-2025/
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