For equity income investors, large-caps have long been the default asset class. Most people more readily associate larger companies with dividends. But that notion belies the growing payout potency of smaller stocks.
In fact, the famously overlooked midcap space is home to a slew of dividend payers. Thanks to ETFs like the WisdomTree U.S. MidCap Dividend Fund (DON ), investors don’t need to stock-pick in this territory.
The $3.81 billion DON turns 19 years old in June. To some investors, an ETF’s age and size are important. But what really matters is performance. That’s a box DON checks with aplomb. Over the past three years, DON beat the S&P MidCap 400 Index with significantly lower annualized volatility. The fund’s highlights don’t end there.
Solid ETF for Long-Term Investors
Experienced market participants know dividend investing is a long-term pursuit. DON is a credible consideration for patient investors and those with the luxury of time.
“The WisdomTree MidCap Dividend Index, which this fund fully replicates, puts a smart twist on a proven strategy,” noted Morningstar’s Ryan Jackson. “It weights about 350 of the mid-cap market’s dividend stocks by their projected cash dividends—a standard fundamental approach—then boosts those with the best combined quality and momentum characteristics by 50%. The extra layer of factor considerations should reduce exposure to stocks whose dividend policies conceal their shaky fundamentals. It also helps the portfolio handily exceed the Russell Mid Cap Value Index in profitability metrics like return on invested capital. That indicates sound exposure to the quality [factor — historically tied] to market-beating returns.”
In simple terms, the WisdomTree U.S. MidCap Dividend Index — DON’s underlying benchmark — weights components by paid dividends, not by market capitalization. Likewise, yield is not a point of emphasis in the ETF’s methodology. That means over the long term that DON’s lineup won’t likely include dividend offenders.
Betting on Value Resurgence
That also implies the stocks making the cut for entry into DON’s index have the ability to maintain current dividend obligations while potentially delivering long-term payout growth. Plus, the ETF could be a solid idea for betting on a value resurgence.
“When this fund restores stocks’ dividend weights at each annual rebalance, it effectively doubles down on firms whose valuations have declined relative to their dividends and peers and trims exposure to the best performers,” concluded Jackson. “That may cause the fund to cling to some unworthy companies and prematurely cut ties with some [winners. This] buy-low-sell-high tack has paid off over time.”
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