It is often said that mid-cap stocks and exchange traded funds go overlooked relative to their large- and small-cap counterparts. When it comes to dividend-based strategies, income investors also overlook mid caps, but the ProShares S&P MidCap 400 Dividend Aristocrats ETF (CBOE: REGL) is changing that conversation.
Dividends work over the long-term and historical data indicate the same is true for mid caps, points that bolster the thesis for an ETF like REGL. Over a long-term horizon, though, mid-caps have outshined the competition. Since 1996, the S&P MidCap 400 generated an average annual return of 10.4%, compared to 7.3% for the S&P 500 and 9.7% for the SmallCap 600.
REGL, which recently turned four years old, follows the S&P MidCap 400 Dividend Aristocrats Index. That is the dividend aristocrats offshoot of the widely followed S&P MidCap 400 Index. REGL’s components, which currently number 49, are required to have minimum dividend increase streaks of 15 years.
Get Right With REGL
Dividend growth rather than high yield can be a potent, less risky long-term income strategy. Company stocks that issue high dividend yields can be masking their distressed books or may not be sustainable and are heading for dividend cuts. Consequently, these quality dividend ETFs try to limit the impact of these value traps by requiring a history of sustainable dividend growth.
REGL can also provide a buffer against declines when mid-cap stocks follower the broader market lower. Over the past year, the S&P MidCap 400 Index is lower by 5.68%, but REGL is higher by 0.73%. Plus, REGL’s dividend yield of 2.09% is more than 70 basis points higher than the yield on the S&P MidCap 400.
Middle capitalization stocks, sometimes referred to as the market’s sweet spot, could help investors achieve improved risk-adjusted returns. Mid-cap companies are slightly more diversified than their small-cap peers, which allows many mid-sized companies to generate more consistent revenue and cash flow and provide more stable stock prices. Additionally, they are not so big that their size would slow down growth.
REGL allocates 41.47% of its combined weight to financial services and utilities stocks. The industrial and materials sectors combine for over 21% of the fund’s weight.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.