Mid Caps: Filling the Income Gap While Seeking Capital Appreciation
TWO BROAD SHIFTS INCREASING INCOME DEMAND
Globally, there are two fundamental shifts happening in the current environment that are increasing the need for income-producing products. First, as baby boomers continue to retire from their work lives, the demand for investment income is likely to grow. According to the 2019 BlackRock Defined Contribution Pulse Survey, “plan participants are sharpening focus on how to secure crucial, ongoing retirement income.”
Second, interest rates have been in a downward trend and most recently have hit record lows. This means that total return from fixed-income assets will not help bridge the $1 trillion funding gap¹ that 76 million baby boomers² are likely to face in pensions, health care and other benefits.
STOCKS COULD OFFER A COMPETITIVE INCOME SOURCE (%)
Source: Evercore ISI (Data 01/31/1995 through 03/31/2020). Past performance is not a guarantee of future results.
MID-CAP STOCKS MAY PROVIDE OPPORTUNITY FOR CAPITAL APPRECIATION, INCOME
In an environment where bond yields are at a record lows, we believe that stocks in the mid-cap universe may be well positioned to fill the income gap and provide an opportunity for capital appreciation. Generally, investors think that dividend-paying companies mostly exist in the large-cap universe. However, as shown below, there are numerous companies in the mid-cap universe that pay dividends.
Many mid-cap companies pay dividends
The Fund was created to achieve a dual mandate of investing in companies that have the potential to grow their dividends and provide an opportunity for capital appreciation across all market cycles. Focused on companies in the mid-cap space, we invest in core growers at a stage in their lifecycles where they have enough earnings growth and are generating cash in excess of what is needed to grow organically that they can offer return of capital to shareholders. Since the Fund’s inception in October 2014, portfolio investments have provided nearly a 3% gross yield and have generated high single-digit income growth annually.
Source: FactSet and Ivy Investments.