Mid-cap stocks are often overlooked relative to their large- and small-cap peers, but the middle is often a great place to be for returns and that’s also true in what’s becoming a rugged dividend environment.
Enter the WisdomTree U.S. MidCap Dividend Fund (NYSEArca: DON). DON is a staple in several of the model portfolios found in the WisdomTree series of Modern Alpha Model Portfolios.
DON, the king among mid-cap dividend ETFs, seeks to track the price and yield performance, before fees and expenses, of the WisdomTree U.S. MidCap Dividend Index. The index is a fundamentally weighted index that is comprised of the mid-capitalization segment of the U.S. dividend-paying market.
“Tony DeSpirito, Chief Investment Officer of U.S. fundamental active equity at BlackRock, says the rules for mid-cap dividend stock-picking are similar to the ones for large-caps—one being don’t stretch for yield,” reports Lawrence Strauss for Barron’s.
Not reaching for yield is an important concept, particularly with DON. The WisdomTree ETF yields 1.49%, more than double the yield on the S&P MidCap 400 Index, but that doesn’t mean DON is a high dividend strategy. Rather, its place in model portfolios is relevant because of it’s quality dividend growth strategy.
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, along with providing more stable stock prices. Additionally, they are not so big that their size would slow down growth. Long-term data also support the notion that active mid-cap managers have a hard time consistently beating their benchmarks
DON allocates just 14% of its total weight to the consumer discretionary and energy sectors, which have been two of the worst groups this year in terms of negative dividend action. While not perfect, DON is doing an admirable job of steering investors away from payout cuts and suspensions.
“Even after the pandemic forced a number of mid-cap companies to suspend or cut their dividends earlier this year, attractive earnings yields among some payers bear watching,” according to Barron’s.
Adding to DON’s relevancy in the current market environment is that mid caps have established histories of outperforming large- and small-cap rivals coming out of crises. There are signs mid caps are poised to repeat and even if that scenario doesn’t overshoot, DON still delivers reliable quality income.
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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.