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There is a common perception that when it comes to dividend investing that huge and prominent companies provide the safest opportunities. But is this always true?

  • First we need to add in a qualifier: buying and holding one or two stocks requires different methods than buying a basket of stocks.

As an example, imagine there were four companies and you somehow knew that two would triple in value and the other two would go bankrupt – but you didn’t know which ones. An investor buying just one company would need a higher level of due diligence than the person who purchased all four companies. The firm-associated risk of loss when buying one stock is higher than when investing in a group of stocks.

This article is not questioning whether on one particular stock it is better to go bigger or smaller. What we want to know is this: do larger market capitalization dividend stocks give higher excess gain on average than smaller ones?

Creating the Setup

First we need a benchmark to gauge our results from. This is our setup:

  • No over-the-counter stocks
  • Price greater than $5 per share
  • No funds
  • Yields over 3%

We will rebalance every 6 months to include only the stocks meeting the above criteria. The results since April 2001?

  • Average of 722 stocks
  • Average 5% compound annual growth rate
  • Average 5.5% current yield
  • Over 58% portfolio drawdown in 2007/08

Sub $1 Billion Market Cap Dividend Stocks

Next we run this same test on smaller-cap stocks of $1 billion or less:

  • Average of 375 stocks
  • Average 3.91% compound annual growth rate
  • Average 5.8% current yield
  • Similar drawdown in 2007/08

$1 - $5 Billion Market Cap Dividend Stocks

  • Average of 200 stocks
  • Average 5.24% compound annual growth rate
  • Average 5.63% current yield
  • Similar drawdown in 2007/08

$5 - $10 Billion Market Cap Dividend Stocks

  • Average of 48 stocks
  • Average 6.56% compound annual growth rate
  • Average 5.5% current yield
  • 54% drawdown in 2007/08

$10 Billion+ Market Cap Dividend Stocks

  • Average of 98 stocks
  • Average 2.99% compound annual growth rate
  • Average 4.66% current yield
  • 60% drawdown in 2007/08

Comparing the Results

Based on what has worked over the past decade, mid-large cap stocks fitting our 'buy criteria' outperform both small and very big market caps. I tested these results in the S&P 500 (NYSEARCA:SPY) and they generally held up with the exception of the largest cap group under-performing the market.

Is there any way we can juice the gains from the $5 - $10 billion market cap group?

Lower Payout Ratios

Lower payout ratios have been associated with higher forward gains. This might be true because a lower payout ratio gives more flexibility to manage future dividends allowing the company to systematically increase them despite fluctuations in cash flows. Lower payout ratios lowers the risk that a dividend will be cut or suspended in the future - an event that has a negative impact on share price.

By adding one filter that retains the bottom 50% payout ratio stocks in an industry, we get the following results:

  • 10% compound annual growth rate
  • Current average yield of 5.17%

Ticker

Name

MktCap

Yield

(NYSE:AEE)

Ameren Corporation

7872.79

4.92

(NYSE:BPL)

Buckeye Partners, L.P.

5951.15

6.42

(NYSE:BPO)

Brookfield Office Properties Inc.

7071.06

3.98

(NYSE:CNP)

CenterPoint Energy, Inc.

8186.43

4.11

(NYSE:DEG)

Delhaize Group (ADR)

5826.43

4.4

(NYSE:ETP)

Energy Transfer Partners LP

9762.71

8.16

(NYSE:KKR)

KKR & Co. L.P.

8214.04

5.91

(NYSE:PNW)

Pinnacle West Capital Corporation

5033.25

4.56

(NYSE:SBS)

Companhia de Saneamento Basico (ADR)

6184.28

8.07

(NASDAQ:SLM)

SLM Corporation

6150.63

3.31

(NYSE:VE)

Veolia Environnement (ADR)

6277.65

14.6

*These are screened results compliments of Portfolio123.com and you will need to do your down due diligence beyond this quantitative scan.

Growing Companies

Another approach we can use to boost gain is to look for growth in a few different areas. This approach will demand 5-year cash flow growth, 5-year earnings growth, and 5-year dividend growth to be above 5%. The results?

  • 12.8% compound annual growth rate
  • 4.2% yields

The total yields dropped as it becomes difficult to maintain high dividend growth once the yields become large in bigger stocks. The increase in annualized share price growth more than makes up for it. Below are the current picks using this strategy but you will need to individually examine each pick listed to determine the current investing suitability beyond this simple scan.

Ticker

Name

MktCap

Yield

CF5YCGr%

EPS5YCGr%

Div5YCGr%

(NASDAQ:ADI)

Analog Devices, Inc.

9901.23

3.01

7.23

14.82

10.91

(BPO)

Brookfield Office Properties Inc.

7071.06

3.98

36.37

49.04

5.26

(CNP)

CenterPoint Energy, Inc.

8186.43

4.11

11.26

9.63

14.29

(DEG)

Delhaize Group (ADR)

5826.43

4.4

6.15

8.34

7.47

(NYSE:DLR)

Digital Realty Trust, Inc.

6626.82

4.31

35.92

21.85

15.1

(NYSE:DRI)

Darden Restaurants, Inc.

6116.61

3.71

7.72

8.76

26.19

(NASDAQ:GRMN)

Garmin Ltd.

6912.52

4.49

13.86

15.67

43.1

(NASDAQ:KLAC)

KLA-Tencor Corporation

7216.57

3.23

14.87

20.13

15.81

(NASDAQ:LLTC)

Linear Technology Corporation

6575.62

3.33

5.71

12.77

13.46

(NASDAQ:MAT)

Mattel, Inc.

9536.28

3.27

7.52

12.85

10.67

(NASDAQ:MCHP)

Microchip Technology Inc.

6301.6

4.22

8.7

14.35

19.24

(NYSE:MMP)

Magellan Midstream Partners, L.P.

7210.63

5

16.98

6.95

7.13

(NASDAQ:MXIM)

Maxim Integrated Products Inc.

7088.64

3.62

7.99

7.08

12.08

(SBS)

Companhia de Saneamento Basico (ADR)

6184.28

8.07

8.01

14.56

5.52

(NYSE:TAP)

Molson Coors Brewing Company

7156.52

3.24

6.47

19.9

11.03

Is Bigger Better?

To a point, it does seem that bigger is indeed better. The trick is to capture dividend stocks at the right point in time. If a company is too new, it might be better off re-investing the profit to aggressively grow. If a company is long past the growing stage while churning out decent amounts of cash, this might not give you the capital gain upside you desire. Mid-large caps with one of the above strategies might just be the right mix of size and growth for many dividend investors looking for a market-beating portfolio. I strongly recommend you use modern screening software as a cost-effective way to improve your trading.

Source: Is Bigger Necessarily Better When Picking Dividend Stocks?