Published on June 16th, 2018 by Kirk J Markey
This is a guest contribution by Kirk J Markey of NoStop Content and does not neccessarily reflect the opinions of the Sure Dividend Team.
Though often underappreciated, undervalued, or ignored, mid-cap stocks can offer dividend investors a middle of the road vehicle for consistent returns.
This article takes a look at the advantages of ‘the ignored middle’; investing in mid-cap stocks for dividend investors.
The Significance of Market Caps for Dividend Investors
Wise dividend investors often use market capitalization to gauge the overall value of a company. This is because market capitalization is usually a better yardstick than a company’s stock price. Utilize the concept of market capitalization and you’ll discover an excellent marker of a stock’s potential performance. Investors usually shorten the term to the simpler ‘market cap’.
To find a company’s market cap, multiply its stock price by its number of outstanding shares. As you might already know, public companies are usually divided into three market cap categories– small, large, and mid-cap. While these is no exact consensus on where the dividing lines are, the following numbers are reliable metrics. Companies with market caps in excess of $10 billion are included in the large-cap category, whereas small-cap companies have market caps that are lower than $2 billion.
Of course, this leaves a large area for mid-cap stocks. Mid-cap stocks are stocks that issue from companies with a market cap between $2 billion and $10 billion. Upon reflection, the relative risk exposure of mid-cap stocks should be apparent. The risk exposure of mid-caps tends to be higher than large-caps, whereas it is generally lower than the amount inherent to small-cap companies.
The Ignored Middle
Large and small-cap stocks are appealing to dividend investors for a number of contrasting reasons, but mid-cap stocks are often underrated or even ignored. This practice is misguided, however, as many mid-cap companies have performed very well in recent years. In fact, once they’re adjusted for relative levels of risk, these stocks have produced higher levels of return than both their small and large-cap counterparts.
Additionally, mid-cap companies represent the largest sector of the U.S. stock world. As a result, dividend investors who omit mid-cap stocks from their portfolio are missing out on an incredibly wide range of opportunities. In the sections that follow, you’ll see why experts often refer to mid-cap stocks as the ‘sweet spot’ of dividend investing.
The Benefits of Dividend Investment in Mid-Cap Stocks
Mid-cap stocks combine some of the most attractive features of small and large companies to make for an intelligent long-term dividend investment practice. Because mid-cap stocks issue from already established firms, they help dividend investors avoid some of the pitfalls inherent to smaller companies.
Mid-caps offer parallel advantages relative to large-cap firms as well– they’re less likely to stagnate or plateau, thus allowing for potentially higher dividend payments over the short and long term. Let’s explore how mid-caps achieve their consistently strong overall performance.
How the Nimble Nature of Mid-Cap Companies can Benefit Dividend Investors
Mid-cap stocks issue from nimble entities– companies that can roll with volatile market changes without alarming investors and thereby devaluing their stock. Generally speaking, these companies have experienced management teams, wide distribution areas, and excellent information technology. They also exhibit a strong market presence and can readily access capital markets as well. These are advantages that small companies simply don’t have, thus making mid-cap stocks more attractive in a variety of important ways.
Just as importantly, mid-cap stocks are more likely to have explosive periods of growth than larger companies. These explosive periods of growth are attributable to a number of factors. Relative to large-cap companies, mid-caps have smaller bureaucracies to navigate when market opportunities arise. Coupled with their smaller management teams, this flexibility allows for the quick decision making that’s so necessary to rapid growth in today’s dynamic market.
We’ve now established the advantages mid-cap stocks display. Next, let’s have a look at how dividend investors can cash in on them in the coming months. Of course, these suggestions won’t guarantee mid-cap stock success. But they will maximize the chances for diligent dividend investors.
Using Dividend ETFs to Zero in On the Upside of Mid-Cap Stocks
Hopefully, you now have a decent grasp on the nature of mid-cap stocks and their potential upside. The question now becomes how to take advantage of it. There are several ways dividend investors can benefit from mid-cap stocks. One of the best ways is through participation in mid-cap dividend ETFs. The next sections describe ETFs and the ways they can benefit dividend investors. They suggest actions you can take in the immediate future but keep in mind that mid-caps require patience and long-term vigilance.
Mid-Cap Dividend ETFs
Targeting a high-performance mid-cap ETF is an excellent way to capitalize on the often ignored mid-cap market. As a reminder, ETF is an abbreviation for ‘exchange-traded fund.’ Simply put, an ETF is a group of securities you can buy or sell through brokerage firms. In general, ETFs share certain features with mutual funds, but they also differ in important ways.
Just as the name implies, mid-cap dividend ETFs are funds comprised of mid-cap stocks. Available in nearly every class of assets, these ETFs offer a number of benefits to investors. The general benefits of ETFs include:
- ETFs are tax efficient. They offer more control over when investors pay capital gains tax.
- While brokers do charge commissions for managing ETFs, the fees are lower than with mutual funds.
- ETFs offer more trading flexibility than mutual funds. They allow for stop-loss, limit, and buy-on-margin orders, whereas mutual funds do not.
Mid-cap dividend ETFs offer these benefits as well. They also present the same disadvantages of more generalized ETFs, so it’s important to stay vigilant and make your decisions carefully. In the last section, we’ll go over a pair of attractive mid-cap dividend ETFs.
Two Mid-Cap ETFs You Should Consider
The Wisdom Tree U.S. MidCap Dividend Fund is a perennial favorite of dividend investors. It has existed for almost 12 years, which makes it the oldest mid-cap dividend fund on the market. Its cumulative return of 3.38% is evidence of Wisdom Tree’s Mid-Cap ETF’s excellent current performance.
The Vanguard S&P Mid-Cap 400 Value ETF stands near the top of our list as well. As of June 2018, its assets totaled over $700 million dollars with a year-to-date return of 3.98%. It’s large three and five-year return rates suggest a pattern of long-term success.
While it’s not entirely clear why mid-cap stocks are often underrated, their appeal is obvious. In addition to the benefits we’ve already discussed, mid-cap stocks also diversify your portfolio and can increase your beta exposure substantially. And while mid-cap companies often perform admirably on their own, they’re often acquired by larger companies.
While these buyouts can sometimes be problematic, they can also boost investment returns substantially. With proper oversight, mid-cap stocks can be an excellent revenue stream for long-term dividend investors.