For retirement investors, it’s all about finding balance these days. On one hand, you need stability and a big dose of dividends. After all, there simply isn’t enough time to make up for huge losses. On the other, retirement investors still need plenty of growth to get them through their golden years. Large-cap stocks might give the stability, but not the needed growth. While betting on the small-fries of the stock market would provide plenty of capital gains potential, but come with a hefty dose of stomach churning volatility.
So what’s a retirement investor to do? Shoot for the middle of course.
Mid-cap stocks offer the best of both worlds. Mid-caps aren’t too big that they aren’t growing anymore, but they aren’t some start-up either. Mid-cap stocks enjoy some of the best parts of both the large- and small-cap worlds. That is, stable business models, bigger dividends, well-known brand names and the ability to keep growing at faster rates than larger corporations.
For retirement investors, those attributes can be a portfolio saver. Mid-cap stocks, as represented by the S&P 400, have managed to return 8.93% annually over the last 10 years. That compares to the 7.22% of the S&P 500. And while mid-cap stocks have under-performed small caps, the amount is quite negligible and comes with less volatility.
In the end, mid-cap stocks could be one of the best portfolio plays for those investors in retirement. Here’s one stock, one ETF and one mutual fund to play the market cap.
Mid-Caps for Retirement Investors: Mid-America Apartment Communities Inc (MAA)
When it comes to individual mid-cap stocks, Mid-America Apartment Communities Inc (NYSE:MAA) could be one of the best bets for retirement investors. MAA offers both high growth and a high dividend yield.
MAA owns 256 apartment communities spanning 80,300 units. The key is the firm’s dual focus on both primary and secondary markets. This has allowed the apartment owner to capture a full spectrum of incomes. Richer city tenants vs. suburban ones. Owning the bulk of those properties in southern states, where foreclosures still reign supreme, hasn’t hurt either. Demand remains strong from MAA’s properties — with occupancy rates in the 96% range.
But Mid-America isn’t done growing. The firm recently made an offer to buy rival Post Properties Inc (NYSE:PPS). That buyout will tack on another 20,000 apartment units in its core operating areas, make MAA the apartment owner in the south, boost cash flows and strengthen the firm’s 3.54% dividend.
In the end, the deal shows just how powerful mid-cap stocks can be for retirement investors. We have a large moated firm, that still is finding meaningful ways to grow, but pays a great dividend. That’s exactly what investor’s should be looking for.
Mid-Caps for Retirement Investors: iShares Core S&P Mid Cap ETF (IJH)
Expense Ratio: 0.12%, or $12 per $10,000 invested annually
For those retirement investors looking for an indexed solution on how to play mid-cap stocks, going with the sector benchmark makes sense. And that means the previous mentioned S&P 400. The easiest way to get that exposure could be the iShares Core S&P Mid Cap ETF (NYSEARCA:IJH).
The $29 billion exchange-traded fund has become the largest fund tracking the index and has now has doubled the assets of the previous mid-cap champion SPDR S&P Mid-Cap 400 ETF (NYSEARCA:MDY). Like MDY, IJH uses a full replication strategy, not a sampling strategy. That provides investors exposure to all 400 mid-cap stocks within the index. Top holdings include almond milk producer WhiteWave Foods Co (NYSE:WWAV) and paint and coatings specialist The Valspar Corp (NYSE:VAL).
So why the switch for the mid-cap stocks ETF crown? One word-fees.
IJH only charges a rock-bottom 0.12% or $12 per $10,000 invested to own it. MDY charges 0.25%. Over time, that little amount will mean that the iShares fund will outperform the State Street SPDR. And with investing being a game of inches, that little amount to help retirement investors realize the growth they need to power ahead.
In the end, when it comes to mid-cap stocks, IJH is the only indexed ETF game in town.
Mid-Caps for Retirement Investors: T. Rowe Price Diversified Midcap Growth (PRDMX)
Expense Ratio: 0.87%
Minimum Initial Investment: $2,500
Mid-cap stocks have long been a favorite hunting ground for active managers. Since most of Wall Street basically ignores them, those opportunistic managers can find the best stocks in the sector to exploit. And the T. Rowe Price Diversified Midcap Growth (MUTF:PRDMX) has been doing that for years.
PRDMX’s managers — Donald Peters and Donald Easley — focus their attention on mid-cap growth stocks, or those that have revenues and earnings that are cooking at faster rates than the overall markets. However, Peters and Easley aren’t traders. They tend to hold stocks for years until they realize their true potential.
Additionally, as the name suggests, PRDMX is a “diversified” fund. Currently, it holds 318 different mid-cap stocks. That helps limit downside risk when looking at faster, moving growth-styled stocks.
By combining the two factors together, PRDMX has had a great long-term history. Over the last five years, it has managed to rack up an average annual return of over 13%. Its 10-year average has even managed to beat the S&P 400 index. So it’s easy to see how the mid-cap stock fund has earned four stars from Morningstar.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.