Billionaire bond manager Bill Gross calls it the "new normal." Most economists agree with him. And it's changing the way many people invest.
In the past 30 years, the U.S. economy has seen an unprecedented expansion, driven by productivity and credit gains. But now that the debt party is ending, the consensus among economists is for an extended period of slower growth.
Slower growth will make it harder for the country to pay its debt.
Since the early 1800s there have been 26 instances of debt-to-GDP going above 90%. Multiple leading economist found that when the debt-to-GDP ratio goes that high, growth is typically reduced by an average of 1%.
This is a troubling sign for the U.S. economy. Our ratio just passed the 100% mark. Another devastating effect of too much debt is the duration of slow growth. In 20 of the 26 cases studied, slower growth lasted for more than a decade.
And this is exactly what is showing up in domestic growth projections right now. From 1947 to 2012, the U.S. GDP grew at an annual rate of 3.2%. But looking forward, most economists have GDP growth pegged between 1.5% and 2% for the next 10 years, according to the Bureau of Economic Analysis.
On the surface, this might seem like a missed opportunity for the big gains of an extended bull market. But slower growth means a higher percentage of the S&P 500s total returns will come from dividends.
This is a typical pattern that has repeated itself throughout the past 100 years. In fact, it's already been happening for the past 12 years.
From 1999 to 2011, the total return for the S&P 500 was 2.7%, with an annual return of 0.2%. During this same time, the Dow Jones U.S. Select Dividend Index returned 133%, with annualized growth of 7.5%, according to Ameriprise Financial.
That dynamic drove big inflows into dividend stocks this year. It hit the large caps the most, with stocks like Wal-Mart (NYSE: WMT) and Coca Cola (NYSE: KO) recently hitting new all-time highs. But now, large caps look overextended, with Coca-Cola and Wal-Mart also trading at unusually high valuations with yields compressed to multi-year lows. Simply put, these large caps have literally no more room to grow.
Meanwhile, mid-cap stocks have been basically flat during the past two years. Keep in mind, a $2 move in a mega-cap such as IBM (NYSE: IBM) could be the equivalent of the full price of a mid-cap stock. This has kept prices and valuations low.
So with an eye for a unique combination of growth and income, here are the 10 highest-yielding mid caps in the S&P MidCap 400 Index and my three favorite choices from the group...
S&P Midcap 400's Top 10 Stocks
|Omega Healthcare Investors Inc. (NYSE: OHI)
Market cap: $2.6 billion
Omega is a real estate investment trust (REIT) that specializes in health care properties in the United States. With a bullish trend in the consumption of health care services providing tailwinds, shares have been hot in 2012, up 15% on the year. Earnings have also been rising, with full-year earnings projected to grow 14% from last year. Shares are trading at just 10 times projected earnings of $2.25 a share in 2013, a discount to the market and its peers. And when you add in an outsized dividend yield of roughly 7.5%, Omega is a compelling combination of growth and income.
|Apollo Investment Corp. (Nasdaq: AINV)
Market cap: $1.7 billion
Apollo is an investment company that specializes in financing middle-market businesses. With interest rates hitting new lows in 2012, Apollo has had a great year, rising 24% for a strong outperformance against the S&P 500's 14% gain. Analysts are looking for modest 5% earnings growth in 2013 to 88 cents per share. That has Apollo trading at a huge discount to its industry average of 25 times earnings, with a forward price-to-earnings (P/E) ratio of just 10. And when you add in a generous dividend yield of about 9.5%, this mid-cap is a great investment for yield-hungry investors who are also looking for growth.
|Senior Housing Properties Trust (NYSE: SNH)
Market cap: $4.1 billion
Senior Properties is a REIT that focuses on senior housing properties in the United States. With the U.S. housing market still struggling to recover from the financial implosion of 2008, shares are up only about 3% on the year and virtually flat in the past five years. But growth looks promising in the long term, as an aging domestic population will continue driving demand for health care resources and facilities. If Senior Housing Properties traded with the same average forward P/E ratio of 16 as its peers, then shares would jump 23%.
Risks to Consider: Mid caps are still relatively small companies compared to other large and mega caps. Keep in mind that changes in the health of the global economy generally have a bigger effect on smaller companies such as small and mid caps.
Action to Take --> With slow economic growth expected for the next decade, mid caps with big dividends such as the ones mentioned here can be a great place to find growth and income. Omega Healthcare, Apollo Investment and Senior Housing in particular, stand out for their bullish prospects and hefty yields.