I continue to believe that dividend-focused investing will make a big comeback relative to growth/capital appreciation, and that mid-caps as well as small-caps will outperform large in the next cycle (which for all we know may be underway now). Let’s focus on the mid-cap side of this with the WisdomTree U.S. MidCap Dividend Fund ETF (NYSEARCA:DON) and see if it’s a good vehicle to play the idea. This is an exchange-traded fund that seeks to provide investors with exposure to US midcap dividend-paying companies. All with an expense ratio of just 0.38%.
Let’s level set. Companies with market capitalizations between $2 billion and $10 billion (the mid-cap range) are often overlooked in favor of more widely covered large-caps or more exciting small-caps. But that might be a mistake: midcap stocks can deliver superior long-term returns, and they should play a significant role in every portfolio. Tilting with a dividend focus within the space can further enhance their total return potential.
A Look At The Holdings
DON has a diverse mix of 332 holdings: As you can see, each holding accounts for less than 1.50 percent of the total assets.
Generally speaking, I prefer funds like this where the top 10 constitutes a reasonable percentage of the portfolio (something you don’t see now in large-cap averages). Less than 10% of the portfolio is in the top 10 – a big risk mitigation, in my view.
Sector Composition and Weightings
Because company weightings are low in the fund, sector allocations matter a lot more. From that standpoint, it should be no surprise that Financials make up the largest allocation, followed by Industrials. Financials and Industrials typically are the largest issuers of investment grade debt, and tend to have healthy dividends.
You might be worried about the large Financials exposure here, but personally, I’m not only because I think we are well past the regional bank crisis of 2023, and if anything, these stocks may have overly discounted negativity.
Peer Comparison
The sector composition for DON lends itself to a more value tilt naturally, so it’s worth comparing the fund against a mid-cap value fund like the Vanguard Mid-Cap Value ETF (VOE) which doesn’t explicitly focus on dividends, but does track similar investments. When we compare the two to each other, we find that the two funds have largely the same performance over the past two years. DON really hasn’t been able to show sustained outperformance. This could change, of course, if the market does start to favor dividends over core, but the biggest driver is just the fact that DON and VOE are mid-cap funds. No clear winner in my view.
The only reason to favor DON to that end would be you actually want the dividends. It’s not huge in terms of the current yield being about 2.2%, but it’s something.
Pros and Cons
On the plus side – strong diversification. The top 10 are well spread out, and the focus on dividend-paying companies should filter out high debt companies which may have problems with higher for longer rates. Mid-caps also usually have higher growth rates than large-caps,
The negative? DON’s large portion going to the Financials sector exposes investors to large risk that could come with the industry. Again, I’m not as worried about that now. Other than that, there is always the question of dividend sustainability. While DON invests in companies that currently pay out dividends, there is no guarantee that these companies will pay or continue to pay dividends in the future. Finally, there is volatility. Midcap stocks can have more volatile prices than large-cap stocks, which might mean more risk and a higher degree of fluctuation in the fund overall.
Conclusion
The WisdomTree U S MidCap Dividend Fund looks like a well-designed vehicle for those with a balanced approach to mid-cap dividend investing. But certainly, factor in the fund’s sector concentrations, any potential risks to dividends, and its general fit for you in terms of investment objectives and risk tolerance. I much prefer this to the S&P 500 here.
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