The Allure Of Mid-Cap Dividends

As expected, S&P 500 dividend growth slipped last year with a spate of payout cuts in the energy sector proving problematic. Energy is the seventh-largest sector weight in the S&P 500.

“Indicated dividend net increases (increases less decreases) rose $3.6 billion during the fourth quarter of 2015 for U.S. domestic common stocks, a massive deceleration from the $12.0 billion increase registered during the fourth quarter of 2014. In dollar terms, the decline equates to a 70.0% year-over-year slowdown in dividend increases. For the full year 2015, dividend net increases fell 29.4% to $38.7 billion compared to an increase of $54.8 billion for the corresponding period in 2014,” said S&P Dow Jones Indices. 

There are other troubling dividend data points. As S&P Dow Jones Indices points out, the number of companies boosting payouts last year was 2,810, which sounds nice until acknowledging that was 15 percent lower the number of dividend raisers found in 2014. Last year, 504 issues decreased their dividend payments compared to 291 decreases in 2014, a 73.2% increase, according to S&P Dow Jones Indices.

One group that looked good on the dividend front last year was mid-caps and if that trend continues, it could be good news for investors in exchange traded funds such as the WisdomTree MidCap Dividend Fund DON and the SPDR S&P MidCap 400 ETF MDY.

“Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices found that 70.5% of the issues within the S&P MidCap 400 pay a cash dividend, the same as in the third quarter, but up from the 68% which paid at the end of 2014.  Within the S&P SmallCap 600, 53.6% of the issues pay, down from the 53.9% which paid at the end of the third quarter, but up from 52.7% which paid a year ago,” according to the index provider.

As its name implies, MDY follows the S&P MidCap 400. DON tracks the WisdomTree MidCap Dividend Index, which weights its holdings based on cash dividend projections for the coming year. In the current environment, mid-cap ETFs have some advantages over their large-cap rivals. 

For example, MDY devotes just three percent of its weight to energy stocks, making that group the ETF's second-smallest sector allocation. Additionally, MDY is lightly allocated to interest rate-sensitive sectors, such as telecom and utilities. Conversely, the ETF features healthy allocations to cyclical sectors like financial services and technology that traditionally perform well when rates rise. 

Notably, financials account for the largest percentage of S&P 500 dividends. MDY currently sports a trailing 12-month yield of 1.32 percent.

For its part, DON is also lightly allocated to energy stocks as six sectors command larger weights in the ETF than energy. DON currently sports a whopping 5.4 percent distribution yield, according to WisdomTree data. 

The ETF holds over 400 stocks, including Coach Inc. COH, Mattel Inc. MAT and Kohl's Corp. KSS.