5 Mid-Cap Dividends For Strong Income

Includes: CINF, ES, NI, NYCB, PCL
by: Dividendinvestr

By Serkan Unal

Dividend investors willing to accept a higher degree or risk for higher assumed returns can invest in mid-cap dividend stocks boasting upside potential and offering decent income. Mid-cap stocks with attractive dividend yields or consistent dividend growth, or a combination of both, represent good investments in the yield-scarce environment. A good source of investment ideas about mid-cap stocks paying attractive dividend yields is WisdomTree MidCap Dividend Fund (NYSEARCA:DON), which invests exclusively in the mid-capitalization segment of the US dividend-paying market. This ETF invests in the mid-cap companies that "compose the top 75% of the market capitalization of the WisdomTree Dividend Index after the 300 largest companies have been removed."

WisdomTree MidCap Dividend Fund, consisting of 353 stocks, has a 12-month yield of 3.4% and a low expense ratio of 0.38%. It has returned 17.4% per year over the past three years. The ETF is dominantly invested in the financial sector. Our analysis centers on five holdings in the top 10 largest positions of this mid-cap dividend ETF. All featured equities have market capitalization between $5 billion and $13 billion and boast high dividend yields well exceeding those on the 10-year Treasuries and the broader market indices.

New York Community Bancorp Inc. (NYSE:NYCB), a multibank holding company, pays a high dividend yield of 7.3% on a payout ratio of 89%. The bank has maintained its quarterly dividend of $0.25 for about two decades. Its competitors Capital One Financial Corp. (NYSE:COF) and Astoria Financial (NYSE:AF) pay dividend yields of 0.3% and 1.7%, respectively. New York Community Bancorp is priced at book value, on par with the broader industry, but has a price-to-cash flow ratio below that for the broader industry. The bank offers a great opportunity for growth as its management hints it is inclined to make an acquisition in the near future. New York Community Bancorp is well capitalized with a tier 1 risk-based capital ratio of 13.7%. It has a long-tenured management in place, committed to the bank's continued success. Analysts forecast that the bank's EPS will expand at a rate of 5.5% per year for the next five years. New York Community Bancorp has an ROE of 8.76%. Its forward P/E is at 12.1, above the banking industry with the ratio of 10.7. Orbis Investment Management (check out its top picks) and value investor Irving Kahn of Kahn Brothers are major hedge fund holders of this stock.

Northeast Utilities (NU) is a diversified utility company providing energy delivery services to customers in Connecticut, New Hampshire, and Massachusetts. Its dividend yields 3.6% on a payout ratio of 72%. The utility's competitors NiSource Inc. (NYSE:NI) and Consolidated Edison (NYSE:ED) pay higher dividend yields of 3.9% and 4.4%, respectively. Over the past five years, Northeast Utilities' EPS expanded at an average rate of 20.8% per year, while dividends increased at an annual rate of 11.3%. Analysts forecast that the firm's EPS will grow at an average rate of about 6.0% per year for the next five years. The utility's merger with NSTAR will expand the Northeast Utilities' scale of operations and customer base, boosting its earnings growth over the long run. The company's investments in the transmission capacity bode well for future earnings and cash flow growth. The stock has a price-to-book of 1.3, on par with its peers on average, and an ROE of 7%. The utility is trading on a forward P/E of 15.7, almost on par with its close peer NiSource. The stock is popular with Phill Gross (Adage Capital) and billionaire Israel Englander.

Cincinnati Financial Corp. (NASDAQ:CINF) is a provider of property and casualty insurance through the Cincinnati Insurance Company. It pays a high dividend yield of 4.0% on a payout ratio of 73%. The insurer's competitors The Chubb Corporation (NYSE:CB) and The Hartford Financial Services Group (NYSE:HIG) pay lower dividend yields of 2.1% and 1.9%, respectively. Over the past five years, EPS of Cincinnati Financial Corp. contracted sharply by 28% per year, while its dividends grew at an average annual rate of 2.9%. Analysts forecast that the insurer's EPS will expand at an average rate of 5% per year for the next five years. The insurer has a free cash flow yield of 4.2% and an ROE of 7.2%. The company has very little debt relative to equity. The holding company has a sizable cash and marketable securities position, which is expected to exceed annual dividends and interest expenses in the foreseeable future. The stock is trading at a small premium to book value. However, it is pricey based on the forward P/E of 23.4, which is well above the industry average of 16.3. Value investor Jean-Marie Eveillard (First Eagle Investment Management) holds nearly half a billion dollars in the stock.

Plum Creek Timber Co. Inc. (NYSE:PCL) is a real estate investment trust that owns and manages timberlands in the United States. The REIT is among the largest landowners in the United States, with approximately 6.4 million acres of timberlands spread over 19 states. The stock pays a dividend yield of 4.0% on a payout ratio of 97% of last year's funds from operations. Its competitors Potlatch Corporation (NASDAQ:PCH) and Weyerhaeuser Co. (NYSE:WY) pay dividend yields of 3.2% and 2.5%, respectively. The company has paid the same quarterly dividend of $0.42 per share since the first quarter of 2007. The recent trends in the housing market, signaling a rebound, bode well for the timber demand. On the back of an expected, robust activity in housing starts, the REIT's sales are forecast to increase 10% in both 2012 and 2013. As regards the timber pricing, CommodityHQ says that "since the beginning of the 20th century timber has outpaced the S&P 500 and has risen by approximately 15% each year since 1987 (save one bad year during the U.S. housing crash)." The Plum Creek's stock has an ROE of 14.8%. Its forward P/E is high at nearly 33, compared with Potlatch Corporation's at 29.3 and Weyerhaeuser Co.'s at 31.6. Jean-Marie Eveillard is the biggest hedge fund investor in this stock.

NiSource Inc. (NI) is a diversified utility company operating gas distribution, gas transmission and storage, and electric operations. It pays a dividend yield of 3.9% on a payout ratio of 97% of trailing earnings. The payout ratio is expected to improve on a full-year 2012 earnings basis, given that the company is forecast to make $1.44 per share this fiscal year, bringing the ratio to 67%. Its competitor Northeast Utilities yields 3.6%, while rival FirstEnergy Corp. (NYSE:FE) yields 5.2%. Over the past half decade, NiSource Inc.'s EPS contracted at a rate of 3% per year, while its dividends expanded at a rate of 0.4% annually. Analysts forecast that this utility company's EPS growth will average about 5% per year for the next five years. The company is planning to invest some $4.0 billion over the next 10 to 15 years in its continued midstream and pipeline growth projects and modernization and development of its existing assets. Along with improvements in service quality, these efforts will support NiSource's operating and financial performance in the future. Barclays recently upgraded its equity rating on this stock from Equal Weight to Overweight and changed its price target from $26 to $27. The stock is currently trading at $24.57 per share. The stock has an ROE of 5.9%. Its forward P/E of 15.6 is almost on par with that of Northeast Utilities but higher than FirstEnergy Corp.'s at 13.4. The stock is popular with Louis Navellier (Navellier & Associates-check out its top holdings).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Dividendinvestr is a team of analysts. This article was written by Serkan Unal, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

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