3 Overlooked Mid-Caps That Pay Solid Dividends

Mid-cap stocks often remain underappreciated in the world of investing, particularly when it comes to their potential for dividend payments. While larger companies like Procter & Gamble and Coca-Cola frequently grab the spotlight due to their consistent dividend payouts and established market presence, mid-cap stocks could be a hidden treasure for income investors.

According to Ben Snider, senior strategist on the U.S. portfolio strategy macro team at Goldman Sachs, “smaller companies have historically grown more quickly than larger, more mature companies.” This growth potential can lead to attractive dividends, yet investors should exercise caution, as not all income from mid-cap stocks comes with the same safety that blue-chip dividends offer. Brian Bollinger, president of Simply Safe Dividends, warned that while mid-caps are perceived to have lower yields, there is often more risk involved. For instance, highly leveraged entities such as real estate investment trusts or business development companies can carry significant risks that might jeopardize dividend payouts.

It’s also essential to note that mid-cap stocks have experienced a certain degree of underperformance compared to their larger-cap counterparts in recent years. The S&P MidCap 400 index’s annual return over five years was recorded at 13.6%, while the S&P 500 achieved slightly higher returns at 15.2%, as indicated by FactSet data. Even more striking is the performance over the last 12 months, where the S&P 500 returned around 7%, contrastively juxtaposed with the mid-caps’ returns, which were in the negative at -3.5%.

Mid-cap indices are particularly susceptible to performance based on cyclical sectors, including industrials, financials, and consumer discretionary stocks. This sector-specific vulnerability has created a risk factor, especially during periods where economic growth appears uncertain, as highlighted by Snider. However, mid-cap indices present a compelling valuation, with a forward earnings ratio of approximately 13 times compared to 18 times for the S&P 500, indicating potentially better prospective returns, as pointed out by Snider.

Key Mid-Cap Stocks Worth Considering

Despite the risks and volatility, there are specific mid-cap stocks that should be on the income investor’s radar due to their solid dividend histories and growth potential.

Old Republic International (ORI)

Old Republic International features a robust yield of around 3% and has a market capitalization of approximately $9 billion. The company has a rich history of returning capital to its shareholders, evident from its recent announcement in February that it would raise its annual dividend to $1.16 per share, a 9% increase from last year’s $1.06. Marking the 44th consecutive year of increased dividends, Old Republic is a specialty insurer operating in fields such as title insurance and property and casualty protection. According to Bollinger, “They’ve just done a great job managing risk, and they’re able to keep growing those premiums each year and slowly expand into niche markets.”

Exponent (EXPO)

Exponent, an engineering and scientific consulting firm with a market cap of about $4 billion, offers dividends yielding 1.5%. The company recently declared a quarterly dividend of 30 cents per share, which represents a 7% increase, marking its 12th consecutive year of dividend growth. Bollinger noted, “Problem-solving never gets old,” reflecting the enduring necessity of Exponent’s specialized services in biomechanics and environmental consulting.

American States Water (AWR)

Another noteworthy mid-cap stock is American States Water, which boasts a dividend yield of around 2.4%. The company manages water and electric utilities and has a long-standing tradition of supporting its shareholders, having paid dividends every year since 1931. Notably, it has increased its dividend payment annually for an impressive 70 straight years and is recognized as a Dividend King, a label given to companies that have raised their dividends for at least 50 consecutive years.

Conclusion

While mid-cap stocks may not always hold the same level of prestige as their larger counterparts, they certainly have merit in the realm of dividend investing. With companies like Old Republic International, Exponent, and American States Water, income investors can uncover opportunities that feature solid dividends and a potential for robust growth. As always, investors should do their due diligence and assess each opportunity in light of their individual risk tolerance and investment goals.