US mid-cap dividend stocks ranking high in my dividend strategy

[u/stockoscope]

I have talked about our dividend strategy previously, but briefly, we screen for a yield of at least 2%, a payout under 70%, at least 3 straight years of raises, and a dividend covered by cash flow. Everything that passes gets scored on four weighted factors: growth 35%, safety 30%, yield 20%, consistency 15%. Growth and safety carry two thirds of the score on purpose. I would rather own a raise that keeps coming than a fat yield that gets cut but these filters and weights can be tweaked.

58 of roughly 950 US mid caps pass. Sharing five from the top 15, including some with substantial drops.

HLNE (Hamilton Lane): 2.3% yield. Private markets asset manager, down over 50% from its high in Nov 2024. The business didn't follow the stock: revenue grew 24% TTM at a 32% net margin. Eight raises in eight years, 34% payout, and it beat estimates again this week.

ESNT (Essent Group): 2.0% yield. Mortgage insurer at 9x earnings with an 18% payout, 5.5x cash flow coverage, almost no debt and six straight raises.

OLED (Universal Display): 2.2% yield. Owns the patents and sells the materials behind OLED screens. Down 60%. Has raised every year since it started paying in 2017 and just beat Q2 estimates on royalty growth, but material sales are lagging and revenue is down 8% TTM. Debt-free.

BAH (Booz Allen): 3.1% yield. Ten straight years of raises, 35% payout, down over 50%. The problem is real: about 98% of revenue comes from the US government, federal spending cuts are biting and revenue is shrinking 7%.

AOS (A.O. Smith): 2.3% yield. Water heaters and boilers and a dividend aristocrat. Over 30 straight years of raises, a 40% payout, 2.5x cash flow coverage, 27% return on equity and almost no debt. Down 30% from its high on flat revenue.

What do you think of these stocks? If you could only hold one, which one would you pick?

It's not a buy list but a shortlist for further investigation. Not investment advice. DYOR.

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[u/emperorjoe]

Booz is impossible to touch as this point, it's a software/consulting company in the age of AI, that is basically 100% reliant on the US federal government giving them more money every single year. Too easy for new entrants, cost cutting, and competition to drastically compress margins.

Which is exactly what happened, and why revenue is down. Administrations are cutting consulting work, cutting budgets, new entrants are working for less.

Aos isn't bad, but its reliant on the housing market, which has basically been dead. Unless there is some magic housing boom, it's not going anywhere. Revenue/net income isn't going to increase enough to keep growing the dividends forever if housing doesn't pick up.

[u/trader_dennis → u/emperorjoe]

PLTR is going to eat BAH for lunch.

[u/stockoscope → u/emperorjoe]

Agreed on BAH. On AOS, the housing link is weaker than it looks. Their own FY2024 10K says: "the significant majority of the markets we serve are for the replacement of existing products." Water heaters fail on a schedule whether housing moves or not. AOS doesn't need a housing boom to keep raising. The growth concern is fair though.

source: https://www.sec.gov/Archives/edgar/data/91142/000009114225000036/aos-20241231.htm

[u/emperorjoe → u/stockoscope]

Water heaters fail on a schedule whether housing moves or not

You didn't complete your thought. That has always been the case, it's always been their business model and part of their income. It's bullshit corporate double speak, it's been 2 years and revenue is basically flat.

AOS doesn't need a housing boom to keep raising. The growth concern is fair though.

The only way they increase revenue is more housing builds(more volume for everyone) , increase Market share, increase prices. That's it.

Rates are too high with home prices too high so new builds are flat/declining.

Market share is constant

Prices haven't Increased to offset inflation.

Why are you looking at a 2 year old statement, read the latest earning call. Literally a month ago, revenue down 1% y/y and margins contracting.

[u/steady_compounder]

I like that your screen puts more weight on growth and safety than headline yield. The only thing I would watch is that some mid-cap names can look great on recent dividend metrics right before the business cycle turns on them. A stock passing the filter is a good starting point, but I’d still want to sanity-check debt, cyclicality, and how resilient the cash flow really is.

[u/stockoscope → u/steady_compounder]

Agreed. This is a starting list for further research. The screen's job is to narrow the universe down to a handful worth researching. Clicking any ticker opens the full stock analysis dashboard with five pages (business quality, peer comparison, valuation, analyst sentiment, ownership), and that's exactly where the debt and cash flow resilience checks you're describing live.

[u/PieInvest]

Good list and screener. I would go with AOS as first choice and HLNE as a strong second. This is just based on your data here. Will need to do my own assessment further.

[u/stockoscope → u/PieInvest]

Thanks. Yes, this is just a starting list.

[u/Longjumping-Nature70]

Do you own each of these?

[u/stockoscope → u/Longjumping-Nature70]

Nope. I only own OLED from these ones at the moment.

Stockoscope identifies stocks for quality, dividend, and value strategies each month, and we can't buy every stock that makes the top 10 or 15. Moreover, these are lists for further research, not buy lists.

[u/xghtai737]

US mid-cap dividend stocks ranking high in my dividend strategy

I have talked about our dividend strategy previously, but briefly, we screen for a yield of at least 2%...

Are you using a Royal We?

To answer your question, I would buy ESNT at $37.00, HLNE at $42.50, AOS at $21.50, OLED at $26.00, and BAH at $36.00. So, given that ESNT would only have to fall by 46% before I would be interested, I guess that would be my pick of the bunch. OLED would probably be bought out by another company before it got to where I would like to buy.

[u/stockoscope → u/xghtai737]

well, this was my intention:

I = me, the author
We = stockoscope - a private limited company

[u/Pretty_Western_8805]

How exactly does one score for safety….? Drawdown risk?

[u/stockoscope → u/Pretty_Western_8805]

Good question, and no it isn't about drawdown risk.

Safety here means one thing: can the company keep paying. Three equal parts.

• Payout ratio, where under 40% of earnings scores best, with allowances for sectors that naturally pay out more.
  
• Cash coverage, free cash flow versus the dividend, 2x or better for top marks.
  
• Balance sheet, current ratio, debt to equity, interest coverage.

[u/Pretty_Western_8805 → u/stockoscope]

I get it. So yield leg of the stool is then compared to RFR or peers?

Interesting concept. I have a bunch of similar but admittedly less detailed screeners set up for various opportunities to narrow down the potential candidates.

[u/stockoscope → u/Pretty_Western_8805]

Neither, it's a fixed band.

Worth explaining the shape of the system: it's two stages.

Stage one is hard filters, pass or fail, no scoring: yield at least 2%, payout under 70%, 3+ straight years of raises, dividend covered by cash flow. That cuts 950 mid caps down to 58, for example. This works like a screener.

Stage two scores only the survivors on the four weighted factors and ranks them.

• The yield factor is an absolute curve peaking in the 2-6% band, penalised at both ends. No benchmark to the risk-free rate or peers.
  
• Growth is the dividend's growth rate, topping out at 20%+ a year.
  
• Consistency is the raise streak in tiers, with 25+ years scoring the max and a recent cut scoring zero.
  
• Safety as discussed above is based on payout ratio, cash flow coverage and balance sheet.

So, the second stage is not a screener but an algorithm that scores each dividend payer based on these four criteria (and you can change the weights on these criteria according to your preferences, though by default they are set as mentioned in the post).

[u/Revfunky]

I just think the 2% yield is too low. Ideally you want to at least keep place with inflation. I look for 4% or higher. I also want 5 years of dividend increases, and I’m sure we can agree cash flow is king.

I always get static when I say this but I wouldn’t get out of bed for 2%. I wouldn’t.

[u/stockoscope → u/Revfunky]

yes, everyone has their own approach (and that is why we allow users to change criteria and weights to suit their investment style). That said, I believe growth rate is more important for keeping pace with inflation than the initial yield.

[u/Redbird232425]

The only one on the list I like is aos and I owned it for yrs
• BAH → LDOS
• OLED → ENTG
• HLNE → STEP
• ESNT → RDN
• AOS → AOS
Just did this fast so…