A Monthly Dividend Payer That’s Beating The Market

Investors on the prowl for top-quality holdings typically seek two things: a history of robust dividends and the potential for substantially greater capital gains than the broader market.

These qualities can be pretty tough to find in just one investment. Yet the WisdomTree MidCap Dividend ETF (NYSE: DON), an exchange-traded fund with net assets of $1.6 billion, offers both strong dividends and the potential for robust capital gains.

Since its launch in June 2006, this ETF is up about 113% versus the S&P 500’s roughly 65% gain. The fund’s annualized dividend of $1.98 a share translates to a solid yield of 2.4%, compared with the S&P’s current yield of only 1.9%.

DON’s track record stems from its bogey, the WisdomTree MidCap Dividend Index. This benchmark is made up of common stocks chosen from the top 75% of the WisdomTree Dividend Index (by market capitalization) after the removal of the 300 largest companies.

To be included in the MidCap Dividend Index, a stock must meet certain requirements:

Pay regular cash dividends during the 12 months before the index’s annual rebalance each December; have a market capitalization of at least $100 million as of the rebalance date; have an average daily dollar volume of at least $100,000 during the three months prior to the rebalance; and a volume factor of greater than $200 million. (This factor is the average daily dollar volume in the three months before the annual rebalance divided by the stock’s index weighting.)

A key advantage of DON is the index weighting used to determine the volume factor. In this case, stocks are weighted by the dollar amount of the coming year’s projected dividends, rather than by dividend yield.

This greatly diminishes risk by reducing the influence of high yields, which can sometimes be a feature of distressed companies. The result is a portfolio comprised mainly of mid-cap value stocks, an asset class that has beaten the broader stock market by about 3% annually over the long haul, according to Morningstar.

In terms of asset allocation, DON is virtually a pure play on mid-cap stocks, which occupy more than 82% of the fund. About 17% of the fund is in small-cap stocks and less than 1% is in large-cap stocks. Sector weightings are typically capped at 25% of fund assets. Currently, the fund is tilted most heavily toward the consumer cyclical, industrial, utilities, real estate and financial services sectors, which are typically among the best sources of dividend-paying stocks.

The following table lists the top 10 out of roughly 400 fund holdings.

WisdomTree MidCap Dividend ETF, Top 10 Holdings
Stock Industry Yield Fund Weighting
Diamond Offshore Drilling Inc. (DO) Oil & Gas Drilling 1.7% 1.1%
Mattel Inc. (MAT) Leisure 5.9% 1.1%
CenterPoint Energy Inc. (CNP) Regulated Utilities 4.8% 0.9%
Coach Inc. (COH) Luxury Goods 3.8% 0.9%
Ameren Corp. (AEE) Regulated Utilities 4.0% 0.9%
Maxim Integrated Products Inc. (MXIM) Semiconductors 3.2% 0.9%
Helmerich & Payne Inc. (HP) Oil & Gas Drilling 3.8% 0.9%
Western Union Co. (WU) Credit Services 2.4% 0.8%
Darden Restaurants Inc. (DRI) Restaurants 3.3% 0.8%
Frontier Communications Corp. (FTR) Telecom Services 8.1% 0.8%
Source: Morningstar

DON’s top 10 holdings are a veritable who’s who of mid-cap dividend stocks. For example, Mattel Inc. (Nasdaq: MAT) distributed about $2 billion in dividends during the past five years, according to Morningstar. Payouts should remain generous as management undertakes global initiatives to boost the well-known toy maker’s top-line performance and free cash flow.

A land-based drilling rig provider that I profiled in May, Helmerich & Payne, Inc. (NYSE: HP), is one of the energy sector’s finest dividend stocks. The firm, which raised its payout by nearly 14-fold during the past six years (to $2.75 a share), has shown in the past that it can emerge from a protracted downturn in oil and gas prices with greater market share and sufficient liquidity for continued dividend growth. That’s shaping up to be the case in the current energy bear market, as well.

Darden Restaurants, Inc. (NYSE: DRI), the owner of Red Lobster, Olive Garden and other successful eatery chains, increased its dividend through the Great Recession to the current $2.20 per share. The firm is making a number of smart moves including targeting the enormous millennial generation, creating a leaner cost structure and streamlining restaurant operations. This should help keep Darden highly competitive and the firm’s payout should keep rising.

Beyond the top-10 list, DON holds positions in many other well-known companies with long histories of reliable dividends. Examples include semiconductor maker Microchip Technology, Inc. (Nasdaq: MCHP), packaged foods firm JM Smucker Co. (NYSE: SJM), office products supplier Staples, Inc. (Nasdaq: SPLS) and tax prep leader H&R Block, Inc. (NYSE: HRB). Dividend yields for these stocks currently range from about 2%-to-3%.

At only 0.38%, DON’s expense ratio is several basis points below the category average. And while a portfolio of mid-cap stocks might be expected to show greater-than-average risk, DON’s value focus has kept volatility in line with the broader stock market over the past five years.
Risks To Consider: DON can display substantial volatility and post annual losses, despite being noticeably tamer than peers. The fund relinquished 6% of its value in 2007 and fell 32% in 2008, the year of the financial crisis. (That year, the typical mid-value fund plunged 39%.)

Action To Take –> With its favorable risk profile, market-beating potential, solid yield and low costs, the WisdomTree MidCap Dividend ETF is a prime choice for the mid-cap portion of investors’ portfolios. If possible, the fund should be held in a retirement account to avoid annual taxation of dividends, which are distributed monthly rather than quarterly like most equities that offer a dividend.

DON offers a solid yield and has long-term growth potential — the perfect fit for The Daily Paycheck portfolio. Amy Calistri, chief strategist for The Daily Paycheck was handed $200,000 to build a portfolio of the best dividend payers on Earth. Her ultimate goal: earn a dividend “paycheck” for every day of the year. So far, she’s collected 1,889 dividend checks and has turned her initial $200,000 into over $310,000 in just over five years.

Best of all, Amy’s strategy is so simple, anyone can use it. In fact, a StreetAuthority employee and novice investor, Matthew Michael, has begun using the strategy to start a retirement account for his two young daughters. To hear more about his story and learn how you can earn similar results for yourself, click here.