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Finding yield in mid-caps

Christine St Anne  |  12 Dec 2012Text size  Decrease  Increase  |  

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Christine St Anne is Morningstar's online editor.

 

When investors think of top dividend payers, they often think of the four major banks and Telstra (TLS). And with good reason - these blue-chip companies have a good track record of returning dividends to investors.

But yield can also be found in the mid-cap sector, with a number of these companies poised to return more to shareholders in the form of dividends.

Contango has launched an initial public offering of a listed investment company (LIC) that targets yield-producing companies in the mid-cap sector.

The Contango Mid-Cap Income Limited is a LIC that invests in 30 to 40 high-yielding mid-cap stocks. Its aim is to provide shareholders with a return of 7.2 per cent (before franking) per annum.

"Effectively, mid-cap stocks are in the 'sweet spot' phase of their life, in that they are still growing their earnings like a small cap, but now starting to reward shareholders with good dividends that can often have high franking components attached," Contango national distribution manager Boyd Peters says.

Peters says Contango's portfolio of quality, high-yielding mid-cap stocks with good yield, franking credits and dividend-per-share growth is designed to complement portfolios that include large-cap investments.

Morningstar co-head of research Tim Murphy says investors need to be very careful when looking at investment opportunities that are aimed at offering high yield.

"With interest rates falling, investors need to ensure they are not blindly chasing yield. Some strategies offering high-yield opportunities can also come with higher risk," he says.

Contango adopts certain investment screens that filter out companies with unsustainable dividend yields.

The investment manager looks at a range of companies in the All Ordinaries, less the ASX 30. Its filter removes specific stocks based on volatility, liquidity and market cap. Contango also excludes stocks with a dividend yield of less than 4 per cent.

A number of companies that are within Contago's investable universe operate in the utilities, property and financial sectors.

These companies include DUET Group (DUE), Charter Hall Retail REIT (CQR), Sydney Airport (SYD)Ardent Leisure Group (AAD) and NIB Holdings (NHF).

DUET Group has majority stakes in Australian energy utility assets, including the Dampier to Bunbury Pipeline, United Energy Distribution and Multinet Gas.

"DUET Group can be held in our portfolio as it possesses quality assets and provides defensive income flows," Peters says.