Mid-cap stocks and the related ETFs often go overlooked compared to large- and small-caps. However, mid-caps have stellar long-term track records and some offer the potential for increased dividend income.
The WisdomTree U.S. MidCap Dividend Fund (NYSEARCA: DON) is one of the more venerable names among mid-cap dividend ETFs. Unlike other dividend-paying stock ETFs, DON weights components based on the total dollar amount of dividends paid as opposed to others that weight components based on yield percentage.
DON, which recently turned 12 years old, 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.
DON’s “approach balances firm size (larger companies tend to make higher aggregate dividend payments) against yield. When it rebalances back to its target dividend weightings each December, the fund adds to stocks that have become cheaper relative to their dividends and trims positions that have become more expensive,” according to Morningstar.
Diversified Mid-Caps
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.
DON’s underlying index, which is home to nearly 400 stocks, has a trailing 12-month dividend yield of 2.96%. The S&P MidCap 400 Index has a dividend yield of just 1.25%.
DON’s “portfolio effectively targets dividend yield without incurring too much risk. Although the fund doesn’t screen its holdings for profitability or dividend sustainability, a few dividend cuts across its portfolio shouldn’t significantly impact its performance because it is broadly diversified and skews toward larger, more-stable names,” said Morningstar.
DON’s largest sector allocation is consumer discretionary at 22.53% while real estate and industrials combine for 30.54%.
“Over the past decade through May 2018, the fund topped the mid-value category average and Russell Midcap Value Index by 3.0 and 1.9 percentage points, respectively, with lower risk,” said Morningstar.
Morningstar has a bronze rating on DON.
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