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Mid-cap dividend growers produce higher investment returns than their big-cap counterparts

by Wayne Cheveldayoff, 2005-08-04

Investors tend to gravitate towards big-cap companies when choosing dividend-paying stocks. But a recent UBS Investment Research study shows that mid-cap stocks with solid dividend records significantly outperformed their big-cap counterparts in the past 10 years.

The UBS study, by equity strategist George Vasic, suggests “it is worthwhile for investors to pay attention to this group.”

For example, in the financial sector, four mid-cap companies with a “spotless 10-year record of dividend growth” posted average annual gains of 21.6 per cent (excluding dividends) since 1995. The group includes Great-West Life, IGM Financial, Power Corp. and Power Financial.

In contrast, a combined group of nine, dividend-growing large-cap financials that are part of the S&P/TSX 60 index, such as Royal Bank and Manulife Financial, produced average annualized gains of 15.7 per cent over the 10-year period.

The group also includes CIBC, National Bank, Bank of Montreal, Bank of Nova Scotia, Toronto-Dominion Bank, Sun life Financial, and Enbridge.

Of course, both mid-cap and large-cap dividend growers outperformed the S&P/TSX 60 index by a large margin, which makes a strong argument for the inclusion of dividend-paying stocks in growth-oriented as well as income-oriented portfolios.

The S&P/TSX 60 index has grown at an average annual rate of only 7.8 per cent from 1995 to the present.

The mid-cap group examined for the study also outperformed the S&P/TSX Mid-Cap index, which gained at an annualized 9.7 per cent during the period.

The study noted that besides the four mid-cap financials with spotless dividend-growing records, there were five other mid-cap financials with “good” dividend records, including AGF Management, Brookfield Properties, CI Fund Management, Industrial Alliance Insurance and TSX Group.

This second group of financials posted average annual gains of 30 per cent over the period, although it has a mixed record of dividend performance with only two (AGF and CI Fund) having a 10-year track record of paying dividends (though not increasing them every year) and with the group having generally higher payout ratios than the first group.

In the consumer/industrial sector, a group of seven mid-cap dividend-paying stocks produced an average annual capital gain of 25 per cent since 1995, versus 12.6 per cent for S&P/TSX 60 big-caps within the same sector.

The mid-caps in this group, with varying dividend records, include Ensign Energy Services, Metro, Jean Coutu, Sobeys, Shell Canada, SNC-Lavalin and Torstar.

The big-cap consumer/industrials include CNR, Dofasco, Imperial Oil, Quebecor World, Loblaw, Magna, Thomson and George Weston.

The study also examined a group of higher-yielding, high-payout, mid-cap stocks, which, like in the big-cap index, come from the telecom and utilities sector.

The mid-cap group showed average annual capital gains of 13.7 per cent over 10 years, compared with 8.6 per cent for the big-cap group.

The mid-cap higher-yielding group includes Atco, Aliant, Emera, Manitoba Telecom and Terasen, while their large-cap counterparts are BCE, Transalta and TransCanada.

In choosing dividend-paying stocks, investors should not just look at how high the yield is.

Investors should also review the dividend growth record as an indicator of future dividend growth, the payout ratio as an indicator of sustainability and potential growth, and share count to see if the company is buying back shares, or increasing the number in circulation, as an indicator of how firms return capital to shareholders.

UBS concludes that “as counterintuitive as it may seem, high-yield stocks are the least attractive for inclusion in income-oriented portfolios.

“While they dangle an attractive yield in front of investors, their spotty dividend growth record, high payout ratios and persistent share dilution undermine their initial appeal.”

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at and he can be contacted at

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©2005 Wayne Cheveldayoff