For long-term investors, the combination of mid-cap stocks and the value factor can be a potent one. Add dividends to that equation and that potency grows.
Mid-cap stocks are often seen as the overlooked segment of the equity market. With that, the group’s dividend capabilities are also overlooked by some investors. The WisdomTree U.S. MidCap Dividend Fund (NYSEARCA: DON) is one of the exchange traded funds that can change investors’ views of dividends and mid-caps for the better.
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.
Long-term data confirm the potency of the mid-cap value trade.
“Mid-cap value has been one of the most consistently performing asset classes over the last 25 years,” said WisdomTree in a note out Thursday. “Despite the relentless underperformance of the value factor since the mid-2000s, mid-cap value has held up much better than its large– and small-cap counterparts. In fact, mid-cap value has beaten the S&P 500 Index on 63% of all rolling 3-year periods, 76% of rolling 5-year periods, 97% of rolling 10-year periods, and on every single rolling 15- and 20-year period.”
The Dandy DON
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.
“According to the latest SPIVA® report, that measures the performance of active funds against their benchmarks, at least 75% of all mid-cap value funds underperformed the S&P MidCap 400 Value Index benchmark over each of the latest 1-, 3-, 5-, 10-, and 15-year periods!,” notes WisdomTree.
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.
“Following another strong year relative to its benchmark, DON is in the top quartile of its Morningstar Mid-Cap Value peer group on all time frames. This includes the latest 5- and 10-year periods in which DON is in the first percentile of all mid-cap value funds,” said WisdomTree.
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