By SARAH MORGAN
Last Friday, after> the Federal Reserve said the bigger banks could once again hike dividend payouts, investors scrambled to buy shares of blue chip financials. But when Foot Locker announced in February it was hiking its dividend, investors barely noticed. Maybe they should have: Investing pros say midsized companies that pay dividends may be a better bet than the giants.
About 244 mid-sized companies defined as having a market value between $750 million and $3 billion pay dividends, compared to 384 dividend-payers in the Standard & Poor's 500 index. But those that do possess many of the same appealing traits as their larger counterparts strong cash flows, stable business models and less volatility than non-dividend-paying stocks, says Mitch Schlesinger, the chief investment officer at FBB Capital Partners.
There's also added potential for faster growth, traditionally a reason investors like midcap stocks in general. Standard & Poor's estimates profits at midsized firms will grow 22% this year, compared to just 15% for their larger brethren. "A case can be made that midcap stocks offer a mixture of growth characteristics with the stability of dividend payments," says Todd Rosenbluth, a mutual fund analyst for Standard & Poor's. That faster earnings growth often translates into rapid dividend growth, says Schlesinger, making for a virtuous circle that rewards investors.
On the other hand, dividend payouts at midsized firms are typically lower than blue chips': The average yield in the S&P midcap index is 1.1%, compared to 1.9% for the S&P 500. And dividend or no, midcap tend to be riskier than bigger, more-established companies, and are prone to speedier price swings, Rosenbluth says. The category has also been on a tear over the past two years the S&P 400 midcap index is up about 136% compared to the S&P 500's 91% gain and some analysts worry that run may soon be over. Consider: Since 1949, midcaps have gained an average of 4% in the third year of a bull market, compared to 5% for large-caps.
To protect against some of that risk, Schlesinger recommends investing only in midcaps with stable earnings and cash flow to support their dividend. How do you spot stability? First, make sure the dividend yield isn't growing faster than the company can afford. One way to measure is to compare a company's projected earnings growth rate to its dividend-growth rate so a company boosting its dividend by 20% should also be notching 20% earnings growth. Investors should also steer clear of companies with excessive debt a tactic of many smaller companies trying to fuel their growth, says Tom Cameron, the chairman of Dividend Growth Advisors. Right now, Don Wordell, who runs the dividend-oriented RidgeWorth Mid-Cap Value Equity Fund,