We recently compiled a list of the 10 Best Mid-Cap Dividend Aristocrats To Buy. In this article, we are going to take a look at where Donaldson Company, Inc. (NYSE:DCI) stands against the other mid-cap dividend stocks.
Investors often overlook mid-cap stocks, assuming they are more volatile than large-cap equities. However, this perception is not entirely accurate, and analysts are increasingly favoring mid-caps. A recent analysis by Goldman Sachs suggested that instead of debating between large-cap and small-cap stocks, investors should prefer mid-caps. Historical data also supports this perspective, with the mid-cap benchmark achieving an 11% compound annual growth rate since 1985, compared to 9% for the broader market and 8% for the small-cap Russell 2000, according to strategist Jenny Ma. Here are some other comments from the analyst:
“Today, mid-cap equities offer investors superior earnings growth at a reasonable price compared with large-caps. Mid-cap stocks have typically outperformed both large-caps and small-caps during the 12 months following the first Fed rate cut in an easing cycle.”
A Bloomberg analysis also revealed that over the past 30 years, mid-cap stocks have significantly outperformed both the broader market and small-cap stocks in cumulative returns. Mid-caps achieved a compound annual growth rate exceeding 12%, compared to approximately 11% for large-caps. This seemingly small difference has a substantial impact over time. For example, a $100,000 investment in mid-cap stocks at the end of 1994 would now be worth around $3 million—about $700,000 more than an equivalent investment in the market. The report also mentioned that between 2000 and 2005, mid-cap stocks outshone all other categories, outperforming not only the broader market but also small-caps and the equal-weighted large-cap index. Their ability to weather the fallout from the internet bubble played a significant role in driving their long-term outperformance over the years.
Also read: 12 Best Long-Term Dividend Stocks to Invest in Right Now
A common misconception about mid-cap stocks is that these companies reinvest most of their earnings into growth initiatives like expansion and R&D, leaving little for dividends. However, analysts suggest that this view may cause investors to overlook valuable opportunities. Mid-cap and small-cap (SMID) dividend-paying stocks, in particular, deserve attention. According to a Wall Street Journal report, SMID dividend stocks have delivered an impressive annual return of 15.68% from 1975 to June 2023, outperforming both large-cap dividend payers and the broader market. In addition, their volatility is about 15% lower than the average SMID stock. The advantages are even greater for SMID stocks that consistently grow their dividends, as these have demonstrated higher annualized returns with lower risk over the past 35 years compared to typical SMID dividend payers.
The MidCap 400 Dividend Aristocrats Index monitors the performance of companies that have consistently increased their dividends for at least 15 consecutive years. A ProShares report highlighted that, since its launch in 2015 through 2022, the index has delivered annualized returns 177 basis points higher than the broader MidCap 400, all while maintaining lower volatility. These mid-cap Dividend Aristocrats have shown resilience during market turbulence by capturing much of the upside during rising markets while limiting losses during downturns—an especially valuable trait during periods of uncertainty. The report further mentioned that during this period, mid-cap Dividend Aristocrats have increased their payouts at an annualized rate exceeding 12%, outpacing both large-cap dividend growth and recent inflation rates. Given this, we will discuss some of the best mid-cap dividend aristocrat stocks.
Our Methodology:
For this list, we scanned the holdings of MidCap 400 Dividend Aristocrats, which tracks the performance of mid-sized companies within the MidCap 400 index that have maintained a consistent track record of increasing dividends annually for at least 15 years. From the index, we picked 10 dividend stocks that have garnered the most attention from hedge fund investors by the conclusion of Q3 2024, using data from Insider Monkey’s database.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A close-up of a factory worker carefully installing a part on an air filtration system.
Donaldson Company, Inc. (NYSE:DCI)
Number of Hedge Fund Holders: 29
Donaldson Company, Inc. (NYSE:DCI) is a Minnesota-based filtration company that is engaged in the production of air filters used in a wide range of industries. The company is focused on growing its market presence, strengthening its customer base, and improving its product offerings through acquisitions. In August 2024, Donaldson acquired a 49% minority stake in Medica S.p.A. The addition of Medica’s technology and expertise in filtration products will allow the company to enter new markets and expand its offerings in the medical device and water purification industries. The stock is up by nearly 11% since the start of 2024.
In fiscal Q1 2025, Donaldson Company, Inc. (NYSE:DCI) reported revenue of over $900 million, which showed a 6.3% growth from the same period last year. Nearly all the segments of the company showed growth during the quarter, with the Aerospace and Defense category emerging as the winner. The segment reported a 26.8% growth on a YoY basis.
Heartland Advisors made the following comment about Donaldson Company, Inc. (NYSE:DCI) in its Q1 2024 investor letter:
“Industrials. Donaldson Company, Inc. (NYSE:DCI), a filtration manufacturer with more than a century of experience in air, lubricant, hydraulic, and fuel filtration applications, is a new position this quarter.
DCI, an example of a stock in our quality value bucket, typically trades at a premium to its peers, an indication of the market’s appreciation for its economically resilient revenues and high profit margins. However, the company has faced margin headwinds lately, in part owing to heavy upfront investment in its fast-growing life sciences segment. Moreover, several of DCI’s cyclical end markets, including agricultural, mining, and construction equipment, have been under pressure as lower equipment utilization has translated into fewer filter replacements.
We think investors have already incorporated the life sciences operating losses in the company’s valuation, but we believe the segment will ultimately be accretive to revenue growth and margins. If life sciences operating margin approaches the corporate average of around 15% over the next two years, that could translate to a 10-15% lift in total earnings power. For context, this segment’s operating margin exceeded 20% prior to the current investment phase…” (Click here to read the full text)
Donaldson Company, Inc. (NYSE:DCI) ended the quarter with over $221 million available in cash and cash equivalents, compared with $232.7 million last year. Its operating cash flow for the quarter came in at $73 million. This cash generation was sufficient to support dividend payments worth $32.4 million. The company’s quarterly dividend comes in at $0.27 per share and has a dividend yield of 1.50%, as of December 16. It is one of the best mid-cap dividend aristocrats on our list as the company has raised its payouts for 29 consecutive years.
As per Insider Monkey’s database of Q3 2024, 29 hedge funds owned stakes in Donaldson Company, Inc. (NYSE:DCI), growing from 26 in the previous quarter. These stakes have a total value of over $308.4 million. Among these hedge funds, Impax Asset Management was the company’s leading stakeholder in Q3.
Overall DCI ranks 3rd on our list of the best mid-cap dividend aristocrats to buy. While we acknowledge the potential of DCI as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than DCI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.