Investing for dividends with large-cap stocks got tricky in the first half of 2020 amid a spate of dividend cuts by S&P 500 member firms. The task wasn’t any easier among smaller equities, including mid caps. However, mid caps remain a compelling source of dividend income when advisors focus on the right strategies on behalf of clients.
An idea to consider is the Core Equity Model Portfolio, which is part of WisdomTree’s broader offering of Modern Alpha Building Blocks portfolios.
Core Equity “is designed for growth-oriented investors with a long-term horizon looking to maximize long-term potential for capital growth through a globally diversified set of equity ETFs,” according to WisdomTree.
In addition to mid-cap exposure, the Core Equity Model Portfolio holds some small-cap dividend ETFs, including some with ex-US exposure, giving advisors a broad-based, multi-regional avenue for sourcing quality payouts.
Mid Caps Matter
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.
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.
One of the components in the aforementioned WisdomTree model portfolio is the WisdomTree U.S. MidCap Dividend Fund (NYSEArca: DON).
“The WisdomTree ETF’s 12-month yield, which factors in dividends paid out by holdings in the fund over the past year, is 3.17%, according to Morningstar,” reports Lawrence Strauss for Barron’s. “Unlike many actively managed funds, which try to zero in on a limited number of securities, this fund recently had about 330 stock holdings, according to Morningstar. So it’s clearly a broader bet on mid-cap dividends, not individual stocks.”
Interestingly, some small and mid-cap dividend stocks offer another advantage: Solid management teams that are unlikely to take on leverage or make acquisition missteps for fear that they could need to cut payouts to compensate for those mistakes.
That doesn’t mean DON will be perfect when it comes to avoiding dividend cuts, but it is a quality approach that advisors can deploy to steer clients away from a rash of negative payout actio.
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.
For more on how to implement model portfolios, visit our Model Portfolio 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.
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