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All Contents © 2020The Kiplinger Washington Editors
By Brian Bollinger, Contributing Writer
| June 11, 2018
Mid-cap stocks are an overlooked and underappreciated area of the market for long-term dividend growth investors.
These companies, generally defined as stocks with market caps between $2 billion and $10 billion, have delivered tremendous performance in recent decades. According to data provided by the Schwartz Investment Counsel, a $1,000 investment made in the S&P MidCap 400 Index on March 1, 1984, would have been worth $74,159 at the end of the first quarter of 2018. For comparison’s sake, the same $1,000 investment made in large caps and small caps, respectively, would be worth only $38,155 and $31,567.
Mid-cap stocks have delivered the highest risk-adjusted returns over the past 20 years relative to small caps and large caps, according to Matthew J. Bartolini, CFA, Head of SPDR Americas Research at State Street Global Advisors.
Mid-caps generally can grow faster than their larger peers (or be acquired more easily) because of their nimbler operations. However, they also tend to enjoy greater diversification, better access to capital, and more proven management teams compared to small-cap companies. Some mid-caps also offer generous payouts, landing on research firm Simply Safe Dividends’ list of the best high-dividend stocks here.
Here are 15 of the best mid-cap dividend stocks right now. Each company yields more than 2% and has a long history of paying uninterrupted dividends.
Data is as of June 8, 2018. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price.
Market value: $3.1 billion
Dividend yield: 5.2%
National Health Investors (NHI, $73.74) is a play on America’s aging society. Specifically, the real estate investment trust (REIT) owns a diverse portfolio of skilled nursing and senior housing properties. The firm’s 225 properties are run by 32 operating partners located across 33 states.
The firm’s leases usually have an initial term lasting 10 to 15 years and hold the tenant responsible for taxes, maintenance and utilities – often referred to as a “triple net” lease. The result is a high-margin stream of cash flow for National Health Investors, so long as its tenants can continue meeting their rent obligations.
Management runs the business conservatively, maintaining relatively low debt ratios for the industry, focusing its business on stronger tenants, and keeping the REIT’s adjusted funds from operations (AFFO) payout ratio at a safer level near 80%.
All these factors position National Health Investors well for America’s aging demographics, which will increase demand for many senior housing properties in the decades ahead.
Market value: $6.4 billion
Dividend yield: 4.5%
Brick-and-mortar retail isn’t the first industry many investors think about when they are seeking long-term growth. Despite its classification as a retail real estate investment trust, National Retail Properties (NNN, $41.96) has plenty to offer, including its resiliency to e-commerce headwinds.
Chris Kuiper, equity analyst at CFRA Research, recently commented, “We see NNN’s portfolio benefiting from the continued economic expansion with little disruption from the negative retailer environment as most of NNN’s tenants are in the services and dining/entertainment lines of business.”
Indeed, National Retail’s management has done a great job positioning the business to continue its profitable expansion. The firm owns 2,800 properties and is well-diversified by tenant (none greater than 6.2%) and industry (convenience stores is the largest exposure at 17.9% of rent). Its properties currently enjoy an occupancy rate in excess of 99% as well, and less than 10% of the company’s rent is up for renewal any year through 2027.
Also, like NHI, the company’s leases are triple-net in nature. (Hence the ticker “NNN.”)
National Retail Properties enjoys an investment-grade credit rating. Thanks to its conservatism and focus on quality, NNN has delivered 28 consecutive years of annual dividend increases. That’s the third longest streak of all public REITs and better than 99% of all public companies, potentially making National Retail Properties an interesting investment candidate for investors living off dividends in retirement.
Market value: $5.7 billion
Dividend yield: 3.6%
The self-storage industry is characterized by low maintenance costs (they are largely self-serve businesses), high switching costs (moving stuff from one warehouse to another is a pain) and recession-resistant demand (stuff needs to be stored somewhere regardless of economic conditions). Increasing population density and America’s aging demographics also serve as long-term tailwinds.
As one of the top three owners and operators of self-storage properties in the U.S. (per the 2018 Self-Storage Almanac), CubeSmart (CUBE, $31.35) is a play on these attractive qualities. The REIT owns or manages 832 stores across the country, and 78% of its facilities are in markets with less supply than the national average.
As a result, CubeSmart should be somewhat less sensitive to the industry’s cycles while continuing to generate a large and growing stream of cash flow as the fragmented industry consolidates over time.
Market value: $8.3 billion
Dividend yield: 3.7%
Pinnacle West Capital Corporation (PNW, $74.40) is a regulated utility based in Arizona that has paid uninterrupted dividends for more than 20 years in a row.
As Morningstar analyst Charles Fishman notes, utilities such as Pinnacle West gain their moats primarily from service-territory monopolies and efficient scale advantages.
While the regulated utility industry is known for its slow growth profile, Pinnacle West profiles better than many of its peers. Specifically, thanks to Arizona’s relatively strong population growth, economic development and job growth, management believes the utility can add 550,000 new customers by 2032, representing nearly a 50% increase compared to the firm’s 1.2 million customers today.
Pinnacle West ultimately expects rate base growth of 6% to 7% per year, which is supportive of management’s 6% annual dividend growth target (one of the fastest rates in the industry). When combined with the utility’s investment-grade credit rating, Pinnacle West appears to be one of the most reliable mid-cap utilities in the market for conservative income growth.
Market value: $6.5 billion
Old Republic International (ORI, $21.50) is one of the oldest insurance companies in the world, with many of its businesses tracing their roots back to the early 1900s. The firm’s insurance products cover everything from automobile extended warranties, workers compensation and trucking insurance to title insurance policies for real estate buyers.
The insurance industry can be hard to evaluate as an outsider looking in. Investors must trust that management is pricing its policies conservatively to avoid big losses. One way to evaluate an insurer’s resiliency and capital management skill is assessing its track record of paying steady dividends.
Old Republic International knocks it out of the park. The firm has paid regular cash dividends without interruption since 1942. One factor that has helped is the company’s limited exposure to property insurance, which faces the most risk from catastrophic events.
With a presence in so many insurance markets, ORI seems likely to continue its slow but steady expansion over the years ahead. Management’s conservative underwriting should also help ensure that the firm is able to continue its 36-year dividend growth streak.
Market value: $5.8 billion
Dividend yield: 3.3%
Formed in 1883, Leggett & Platt (LEG, $43.64) is one of the oldest public companies in America. The company began by selling steel coil bedsprings and has grown into a diversified manufacturer of various components used in furniture, bedding, vehicles, airplanes and other products.
While this may sound like a commodity business, Leggett & Platt has done an excellent building up a reputation for quality and capitalizing on its manufacturing scale. As a result, the firm has increased its dividend for 47 consecutive years and is, in fact, a Dividend Aristocrat.
Going forward, management targets 6% to 9% annual revenue growth, which should drive high single-digit dividend growth. Given the company’s reach into so many different end markets, along with management’s capital allocation track record, Leggett & Platt’s targets seem reasonable.
Market value: $3.9 billion
Dividend yield: 2.9%
At first glance, Bemis (BMS, $42.69) is a boring business. Founded in 1858, the company produces plastic packaging for food, healthcare, consumer products and industrial applications. However, as Warren Buffett likes to say, boring can be beautiful.
And Bemis has certainly been beautiful for investors seeking predictable income growth. The company has raised its dividend for 35 consecutive years.
While more than half of Bemis’ revenue is generated in the U.S., where demand growth is relatively slow, the business is quite international. Bemis generated approximately 18% of its 2017 revenue from Latin America, and another 18% of sales is generated from “Rest of World,” which includes packaging operations in Asia-Pacific and Europe, but also rolls in its healthcare businesses, part of which derive revenues from the U.S. These platforms enjoy stronger growth rates that should help management continue the firm’s predictable dividend increases.
Market value: $3.4 billion
Dividend yield: 2.8%
The most interesting mid-caps have long runways for growth, and PS Business Parks (PSB, $123.30) is no exception. The REIT owns 94 business parks, which primarily consist of multitenant industrial and flex space, as well as some office properties.
Importantly, these properties are all located in seven of the top 15 fastest-growing industrial real estate markets. Unlike the retail industry, which is experiencing its share of headwinds, PS Business Parks’ customers are generally in stable or expanding areas, such as e-commerce and technology. Better still, no sector makes up more than 18.4% of total rent (led by business services).
Besides a healthy amount of customer diversification, PS Business Parks reduces risk by maintaining a very strong balance sheet that has earned an “A-” corporate credit rating from Standard & Poor’s. This helps ensure the REIT will continue to have ample access to low-cost capital with which it can expand its property portfolio and comfortable grow its dividend in the future.
With fewer than 100 business parks in the portfolio today, PS Business Parks should have no shortage of profitable acquisition opportunities going forward.
Market value: $6.8 billion
Dividend yield: 2.5%
RPM International (RPM, $50.94) is a specialty chemicals business that manufactures a diverse portfolio of specialty paints, coatings, sealants, adhesives, and roofing systems. From Rust-Oleum paints to Sonhard flooring systems, RPM’s products are used across industrial (52% of sales), consumer (34%) and specialty (14%) markets.
Management focuses on niche areas where the company can achieve strong brand leadership and pricing power. Acquisitions are a key part of RPM’s strategy as well. The firm looks to close five to 10 acquisitions each year, homing in on niche businesses with leading brands. Upon making a deal, RPM can take advantage of its global distribution channels, manufacturing scale and unique technologies to extract synergies.
Management’s strategy has proven successful over the years; in fact, RMP boasts 44 consecutive years of cash dividend increases. Only 41 of all 19,000 publicly traded companies in the U.S. have an equal or better record, and RPM will join the Dividend Kings list (half a century of hikes) in just six years.
While it’s true that industrial markets can be cyclical, RPM is somewhat less sensitive because 60% of its sales are driven by less cyclical repair and maintenance markets. Simply put, there are numerous reasons why RPM is an appealing mid-cap dividend stock.
Market value: $5.3 billion
Dividend yield: 3.0%
Sonoco Products (SON, $53.19) was founded in 1899 as the Southern Novelty Company. The company manufactures industrial and consumer packaging products throughout the world. From cans and paperboard, to plastic tubes and film, Sonoco’s products cover a wide range of materials.
Some of the company’s key markets include food packaging, converted paperboard products, and display packaging seen in retail stores. Sonoco’s customers are primarily major consumer goods companies such as Kraft Heinz (KHC) and Procter & Gamble (PG).
The packaging industry is highly competitive and price sensitive because sustained product differentiation is quite difficult. However, Sonoco’s broad portfolio of solutions and global manufacturing scale make it a natural partner for the biggest consumer goods companies.
Morningstar equity analyst Charles Gross believes Sonoco will continue gaining market share in supermarkets as it develops new consumer packaging solutions. Mr. Gross cites some of the company’s innovations over the years such as the Pringles can and resealable cookie containers, also noting Sonoco’s annual R&D investments in excess of $20 million.
Management expects to grow the company’s sales from $5 billion in 2017 to $6.3 billion in 2020, and shareholders can expect meaningful cash returns over that time. In fact, Sonoco has returned cash to shareholders for 93 years, giving it one of the richest operating histories of any company in the market.
Market value: $8.9 billion
Dividend yield: 2.0%
Snap-on (SNA, $156.94) was founded in 1920 and serves customers in more than 130 countries around the world. The company makes a variety of power tools, shop equipment, tool storage and diagnostics systems used primarily by car dealerships and repair centers, in addition to a variety of industrial markets such as aviation.
As Snap-on notes, these are “serious professionals and their work entails tasks of consequence, often in harsh and punishing conditions, where the cost of failure is high.”
Over the decades, Snap-on’s tools have developed a reputation for quality and reliability, winning over customers’ loyalty around the world. The company also has several tailwinds it should benefit from over the coming years.
Morningstar senior equity analyst Richard Hilgert put it well when he wrote, “We think Snap-on is well positioned to benefit from growth in the vehicle repair market, thanks to the aging vehicle fleet, increased vehicle complexity, and new vehicle technologies that require the development of innovative tools.”
Management has proven to be very friendly to dividend investors, too. The company announced its eighth consecutive annual dividend increase in 2017, and Snap-on has paid uninterrupted dividends dating back to 1939. As Snap-on continues taking advantage of the aging vehicle market, shareholders are likely to enjoy solid dividend growth in the years ahead.
Market value: $5.9 billion
Dividend yield: 2.4%
Aqua America (WTR, $33.73) is an intriguing mid-cap dividend stock for several reasons. For one thing, Argus analyst Jacob Kilstein, CFA, thinks the company will “benefit from expected investment of more than $700 billion in the nation’s water and wastewater infrastructure recommended by the EPA over the next two decades.”
Aqua America is a water and wastewater utility that serves about 3 million people across eight states, including North Carolina and Texas, which are enjoying relatively fast population growth. The company has largely expanded via acquisition, buying close to 200 utilities over the last decade.
As a regulated utility, Aqua America enjoys a very predictable return on its investments, and the non-discretionary nature of water consumption ensures a steady stream of cash flow from its customers. Management expects 7% rate base growth and 2% to 3% customer growth in 2018, which should keep earnings rising.
Thanks to management’s conservatism over the years and the steady nature of its business, Aqua America has paid quarterly dividends for 73 consecutive years. For a utility, its pace of dividend growth has been impressive as well, recording a dividend compound annual growth rate of 7.9% since 2012.
Market value: $6.9 billion
With more than 300 locations, Reliance Steel & Aluminum (RS, $95.60) is the largest metals service center company in North America. The company buys various metals, such as steel and aluminum, and processes them into different shapes and forms to meet customer specifications. Reliance Steel has a well-diversified business, distributing over 100,000 metal products on a just-in-time inventory management basis to more than 125,000 customers across a range of industries.
While steel manufacturers are notorious for their extreme cyclicality, metal service centers generate much steadier cash flow since they essentially act as cost-plus businesses. In other words, they usually pass on most of the increases in metal costs to their customers and have minimal contract sales. A great example of this more predictable business model in action is Reliance Steel’s track record of paying consecutive quarterly cash dividends for 59 years.
Despite its industry-leading size and long dividend history, Reliance Steel has plenty of opportunity to continue growing. Management estimates that the company has less than 5% market share of the U.S. metal wholesale industry, providing ample opportunity for acquisitive growth. The firm has purchased 64 service center companies since 1994, but there are a total of 7,100 companies in the U.S. industry alone.
Dividend yield: 2.2%
Founded in 1941, MSC Industrial Supply Co. (MSM, $93.39) is a national distributor of metalworking and maintenance, repair and operations products and services to help manufacturers across the country reduce their supply chain costs.
Distribution is often a challenging business with low barriers to entry and weak margins. However, as Morningstar equity analyst Brian Bernard notes, “MSC’s superior scale and ability to monetize its strong network of customers and suppliers have allowed the firm to earn excess returns, and we expect the rim will maintain its competitive advantages over at least the next 10 years.”
By maintaining relationships with more than 3,000 suppliers, offering over 1.5 million SKUs and providing same-day shipping, MSC Industrial Supply is well-positioned (as one of the largest players in the industry) to help its customers save time and money.
MSC’s value proposition has helped it generate double-digit annualized sales and earnings growth over the last 20 years, true to its mid-cap reputation. Given the extreme fragmentation of the market (there are approximately 145,000 distributors, per Morningstar) and MSC’s enduring competitive advantages, the firm’s growth runway remains strong.
Market value: $2.3 billion
Dividend yield: 5.9%
Main Street Capital (MAIN, $38.73) is a business development company, or BDC. BDCs can be an attractive source of income since they are required to distribute at least 90% of their taxable income in the form of dividends each year. However, given their more complicated business models, investors can read Simply Safe Dividends’ guide to BDC investing here.
Main Street Capital is arguably the gold standard in the BDC industry. The firm has over $4 billion in capital under management that it invests in middle market companies. These are smaller businesses with revenue between $10 million and $150 million that are usually unable to raise affordable capital from the big banks, creating opportunities for BDCs to serve their financing needs.
Given the higher-risk nature of many of these borrowers, Main Street takes a well-diversified approach to its investment portfolio. The firm has 187 portfolio companies today, with the largest individual company representing just 2.9% of the portfolio’s fair value.
Its largest industry exposure (construction & engineering) is 8% of its portfolio’s cost basis, and the businesses it provides financing for are nicely scattered across the United States. Main Street’s internal management structure also reduces its costs, and management’s conservative use of leverage helps earn the company an investment grade credit rating.
Since its IPO in 2007, Main Street Capital has never decreased its regular dividend rate, making it one of the best monthly dividend stocks on the market During this time, its recurring monthly dividend has grown 73%. With a strong yield, disciplined risk management, and one of the lowest costs of capital in the fragmented BDC space, Main Street Capital has a lot to offer mid-cap investors.
Brian Bollinger was long MSM and NNN as of this writing.