This year, plenty of large-cap equities are providing dividend pain, prompting concern about the fate of small- and mid-cap payouts. However, with the right strategy, investors can find dependable dividends among smaller stocks, and the ProShares S&P MidCap 400 Dividend Aristocrats ETF (CBOE: REGL) fits the bills as the “right strategy.”
REGL follows the S&P MidCap 400 Dividend Aristocrats Index, the dividend derivative of the S&P MidCap 400. The ProShares fund’s mandate is a minimum dividend increase streak of 15 years, which is high in the universe of mid-cap equities.
“As of July 31, only two companies that were in the S&P MidCap 400® Dividend Aristocrats® —an index of mid-cap companies that have raised their dividends for at least 15 consecutive years—had cuts,” according to ProShares research.
The mid-cap category has also outperformed their larger peers, but with lower volatility than small caps. Moreover, the returns of mid-cap stocks have also beaten those of small-cap stocks during the trailing three-, five-, and 10-year periods, with lower volatility.
Additionally, history shows mid-cap stocks often outperform following crises or big equity market drawdowns. REGL, which yields 2.59%, is higher by 48.15% off its March lows.
“This resiliency among mid-cap and small-cap dividend growers is particularly impressive. Dividend cuts are typically more prevalent the farther down one looks in market capitalization. In fact, during 2020 so far, nearly one-quarter of all mid- and small-cap dividend-paying companies have been forced to cut their dividends,” according to ProShares.
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. Increased mergers and acquisitions activity could be just what mid-caps need to catch up to large- and small-cap stocks.
In today’s climate, REGL’s quality perch, though perhaps surprising to some investors, is exceedingly meaningful.
“Both the S&P MidCap 400 Dividend Aristocrats and the Russell 2000 Dividend Growth Indexes generate higher profit margins, return on equity and have lower debt levels than their broader parent indexes. Of note, profit margins and return on equity are negative for the overall Russell 2000, while positive for the Russell 2000 Dividend Growth,” notes ProShares.
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