Mid- and small-cap stocks are often glossed over in favor of large caps by investors seeking equity income, but with the right strategy, investors can harness steady payouts with mid-cap fare. The WisdomTree U.S. MidCap Dividend Fund (NYSEARCA: DON) is one way to do just that.

DON tracks the WisdomTree U.S. MidCap Dividend Index. That benchmark is “dividend weighted annually to reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year, based on the most recently declared dividend per share,” according to WisdomTree.

“WisdomTree’s dividend-weighted mid- and small-cap Indexes offer diversification from richly valued large caps, and more growth potential than Utilities,” said the issuer in a recent report. “Because smaller companies are typically priced at discounts to their larger peers to compensate for additional risk, investors can obtain higher yields by allocating down the size spectrum for yield.”

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.

Dandy Dividends With DON

Historical data indicate that even modest allocations to mid-cap stocks can improve long-term returns compared to portfolios that don’t feature mid-cap exposure.

“While the universe of mid- and small-cap dividend payers is smaller than it is for large caps, a broad universe of 68% of the Russell Midcap Index and 43% of the Russell 2000 Index constituents do pay dividends. This percentage has steadily increased over the past decade,” according to WisdomTree.

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.

“Over the past 20 years, using market cap weighting, non-dividend payers within the Russell Midcap have underperformed dividend payers by 4.46% annualized. Within the Russell 2000, the non-dividend payers have underperformed by 3.48% annualized,” notes WisdomTree. “During certain periods where growth significantly outperforms value, non-dividend payers—highly correlated to small-growth—tend to outperform. Over the long run, these small-growth companies have lagged their dividend-paying peers and have done so with higher risk (standard deviation).”

For on income strategies, visit our Retirement Income Channel.

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.