They say that middle children get less attention from their parents versus their older and younger siblings. Well, when it comes to portfolios, many investors do the same.
While many investors focus on larger multinationals for safety and smaller firms for growth, mid-cap stocks are often ignored when it comes to portfolio construction — especially those investors in or nearing retirement.
And that’s a real shame.
Mid-cap stocks — or those firms within the $2 billion and $10 billion market cap range — can be among the best investments you can make. These stocks enjoy some of the best parts of both the large- and small-cap worlds — they have less volatility, bigger dividends, more access to debt and more stable business models than small-caps, but they also typically have far more room for growth than their larger-cap brethren.
Thanks to all these attributes, mid-cap stocks have done extremely well over the long-term. The mid-cap-focused S&P 400 has managed to return 9.96% annually over the past 10 years. That compares favorably to just 8.12% annually for the S&P 500, and it’s just 8 basis points behind the risk-heavier small-cap S&P 600. That’s a good tradeoff.
Mid-cap stocks belong in all portfolios, retirement or not. So if you’re not specifically invested in these companies, here’s how to do so — via one individual mid-cap stock, one exchange-traded fund (ETF) and one mutual fund.
Mid-Cap Stocks for Retirement: Church & Dwight Co., Inc. (CHD)
When it comes to mid-cap stocks, the key is finding a balance of growth and stability.
Consumer products company Church & Dwight Co., Inc. (NYSE:CHD) fits that bill.
While Church & Dwight’s corporate name might not be as well known as other consumer staples giants like Procter & Gamble Co (NYSE:PG) and Johnson & Johnson (NYSE:JNJ), its products certainly are — products including Arm & Hammer baking soda, OxiClean stain fighting solutions and Trojan condoms.
The key for CHD’s continued success is that many consumers traded down to the firm’s lower price points for toothpaste, laundry detergent and soaps after the Great Recession. Plus, innovative products across its major brand lines have many consumers sticking with CHD as their financial situations improve.
As a result, Church & Dwight has enjoyed rising sales for years, and that has trickled down to the cash flow front. For the latest quarter, Church & Dwight’s cash flows net cash from operating activities clocked in at $144.2 million — a $41.8 million increase over the year-ago period.
Investors have loved the byproduct of all that cash: increased dividends. CHD has upped its payouts from 8.5 cents quarterly in 2010 to a current payout of 33.5 cents quarterly — an improvement of nearly 300%!
Steady sales growth, dividend hikes and shares that look poised to keep improving on their current all-time high? All in all, CHD could be one of the best mid-cap stocks to buy and hold for retirement.
Mid-Cap Stocks for Retirement: SPDR S&P MidCap 400 ETF (MDY)
Investors looking for a cheap, broad way to add mid-caps into their portfolios should strongly consider the SPDR S&P MidCap 400 ETF (NYSEARCA:MDY).
The $17 billion MDY tracks the previously mentioned mid-cap S&P 400 index using a full replication strategy. That provides investors exposure to all 400 mid-cap stocks within the index — not just a sampling.
Top holdings currently include jewelry store Signet Jewelers Ltd. (NYSE:SIG) and scientific instruments producer Mettler-Toledo International Inc. (NYSE:MTD). Financials (23%), tech (17%) and industrial stocks (16%) round out the top sector weightings for MDY.
While the fund sports heavy volume from institutional investors and traders alike, don’t let that fool you — this ETF is for buy-and-hold retirement investors as well. MDY has posted impressive returns for all periods, including a 12.17% annual total return since its inception in 1995 … and charges a mere 0.25%, or $25 annually per $10,00 invested, in fees.
Mid-Cap Stocks for Retirement #3: Baron Asset Fund Retail Class
Given that most investors ignore mid-cap stocks, the space can be a fruitful hunting ground for active managers looking to score both value and growth.
Mutual fund group Baron Funds made a name for itself back in the 1980s by focusing on mid-cap stocks with a long-term horizon, usually holding stocks for four to five years.
While the provider’s lineup has expanded, the Baron Asset Fund (MUTF:BARAX) remains its flagship fund.
Run by Andrew Peck since 2003, BARAX’s strategy is to invest in mid-cap U.S. companies that have matured beyond their startup phase — the sweet spot for mid-caps. Peck looks for firms with significant secular growth opportunities and follows the Baron philosophy by holding them for years until those stories play out. BARAX’s turnover ratio is an insanely low 12%, and investors benefit from that, as heavy churn racks up trading fees and sap returns.
Currently, the fund holds a relatively concentrated portfolio of 64 different stocks, including Gartner Inc (NYSE:IT), Idexx Laboratories, Inc. (NASDAQ:IDXX) and Vail Resorts, Inc. (NYSE:MTN).
That portfolio selection has powered BARAX past the S&P 500 and its own benchmark index, the Russell Midcap Growth Index. Since inception in 1987, BARAX has returned an annualized 11.49% vs. 9.62% and 10.18% for the S&P 500 and Russell Midcap Growth, respectively.
BARAX has no load fee and charges 1.31% in expenses annually.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
