Billionairebond manager Bill Gross calls it the "new normal."
Most economists agree with him. And it's changing the way many
In the past 30 years, the U.S.economy has seen an unprecedented
expansion, driven byproductivity and credit gains. But now that the
debt party is ending, the consensus among economists is for an
extended period of slower growth.
Slower growthwill make it harder for the country to pay its
Since the early 1800s there have been 26 instances of
debt-to-GDP going above 90%.Multiple leading economist found that
when the debt-to-GDP ratio goes that high, growth is typically
reduced by an average of 1%.
This is a troubling sign for the U.S. economy. Our ratio just
passed the 100% mark. Another devastating effect of too much debt
is theduration of slow growth. In 20 of the 26 cases studied,
slower growth lasted for more than a decade.
And this is exactly what is showing up in domestic growth
projections right now. From 1947 to 2012, the U.S.GDP grew at an
annual rate of 3.2%. But looking forward, most economists have GDP
growth pegged between 1.5% and 2% for the next 10 years, according
to the Bureau of Economic Analysis.
On the surface, this might seem like a missed opportunity for
the big gains of an extendedbull market . But slower growth means a
higher percentage of the S&P 500s total returns will come from
This is a typical pattern that has repeated itself throughout
the past 100 years. In fact, it's already been happening for the
past 12 years.
From 1999 to 2011, the total return for the S&P 500 was
2.7%, with an annual return of 0.2%. During this same time, the Dow
Jones U.S. Select DividendIndex returned 133%, with annualized
growth of 7.5%, according to Ameriprise Financial.
That dynamic drove big inflows intodividend stocks this year. It
hit the large caps the most, with stocks like
Coca Cola (
recently hitting new all-time highs. But now, large caps look
overextended, with Coca-Cola and Wal-Mart also trading at unusually
high valuations with yields compressed to multi-year lows.
Simplyput , these large caps have literally no more room to
Meanwhile, mid-cap stocks have been basically flat during the
past two years. Keep in mind, a $2 move in a mega-cap such as
could be the equivalent of the full price of a mid-cap stock. This
has kept prices and valuations low.
And it's precisely that what's driving interest inmid caps right
now, particularly the onesoffering dividend yields.
So with an eye for a unique combination of growth and income,
here are the 10 highest-yielding mid caps in the S&P MidCap 400
Index and my three favorite choices from the group...
S&P Midcap 400's Top 10 Stocks
Omega Healthcare Investors Inc. (
Market cap: $2.6 billion
Omega is areal estate investment trust (REIT) that
specializes in health care properties in the United States.
With abullish trend in the consumption of health care
services providing tailwinds,shares have been hot in 2012,
up 15% on the year.Earnings have also been rising, with
full-year earnings projected to grow 14% from last year.
Shares are trading at just 10 times projected earnings of
$2.25 a share in 2013, a discount to the market and its
peers. And when you add in an outsizeddividend yield of
roughly 7.5%, Omega is a compelling combination of growth
ApolloInvestment Corp. (Nasdaq: AINV)
Market cap: $1.7 billion
Apollo is an investment company that specializes in
financing middle-market businesses. With interest rates
hitting new lows in 2012, Apollo has had a great year,
rising 24% for a strong outperformance against the S&P
500's 14% gain. Analysts are looking for modest 5% earnings
growth in 2013 to 88 cents per share. That has Apollo
trading at a huge discount to its industry average of 25
times earnings, with a forward price-to-earnings (P/E )
ratio of just 10. And when you add in a generous dividend
yield of about 9.5%, this mid-cap is a great investment for
yield-hungry investors who are also looking for growth.
Senior Housing Properties Trust (
Market cap: $4.1 billion
Senior Properties is a REIT that focuses on senior
housing properties in the United States. With the U.S.
housing market still struggling to recover from the
financial implosion of 2008, shares are up only about 3% on
the year and virtually flat in the past five years. But
growth looks promising in the long term, as an aging
domestic population will continue driving demand for health
care resources and facilities. If Senior Housing Properties
traded with the same average forward P/E ratio of 16 as its
peers, then shares would jump 23%.
Risks to Consider:
Mid caps are still relatively small companies compared to other
large andmega caps . Keep in mind that changes in the health of the
global economy generally have a bigger effect on smaller companies
such as small and mid caps.
Action to Take -->
With slow economic growth expected for the next decade, mid caps
with big dividends such as the ones mentioned here can be a great
place to find growth and income. Omega Healthcare, Apollo
Investment and Senior Housing in particular, stand out for their
bullish prospects and hefty yields.