As Europe continues to struggle with debt issues and the United States battles its political gridlock, some analysts are predicting slow to no growth for the economy throughout the upcoming year. High unemployment, low consumer confidence and impending austerity plans do not make for healthy markets. To that end, many advisors are now shifting portfolios to heavy allocations in dividend stocks. Funds like the Vanguard High Dividend Yield ETF (ARCA:VYM) have exploded in popularity as investors have flocked to dividend-focused investments. However, dividends aren't the only way to keep a portfolio growing in a sideways market. One group of goldilocks stocks could be the key to a profitable new year. (For related reading, see Finding Value In A Sideways Market.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Right in Middle
Mid-cap stocks could be exactly what a portfolio needs to get through 2012. These firms, with market caps between $2 billion and $10 billion, provide the right mixture of attributes for a slow-moving market. These stocks typically enjoy strong cash flows, stable business models and less volatility than smaller equities. Plus, midcaps are just small enough to grow faster than their larger counterparts. These factors have helped the market sector outperform both its larger and smaller sisters over long stretches of time. During 2010, the SPDR S&P MidCap 400 ETF (ARCA:MDY) increased by an impressive 25%, while the large cap-based SPDR S&P 500 ETF (ARCA:SPY) returned only about 13% during the same time period. Over the last 10 years, the MDY returned around 73% to SPY's approximately 9%.

However, investing in mid-cap equities may be appealing to investors on another front: increased acquisition activity. The recent buildup of company cash over the past few years has produced a buyout binge not seen in years. Currently, large-cap firms are sitting on around $1 trillion worth of cash and equivalents on their balance sheets. Reluctant to hire or open new plants, many large firms have gone on acquisition sprees to spur growth. Mid-cap firms are often the targets of these buyouts, and the market segment should perform well as merger and acquisition (M&A) activity increases. The sector seems ripe for this investment as the global crisis has left mid-caps at their lowest valuations since the early 1990s. Several indicators, such as price to sales ratio, are still near historical lows, and earnings forecasts have still been robust. (For addtional reading, see How To Analyze Mid-Cap Stocks.)

Playing the Midcap Space
With their strong growth potential and stability, mid-cap firms could be exactly what the doctor ordered during this sideways market. Funds like the Vanguard Mid-Cap Value ETF (ARCA:VOE) and WisdomTree International MidCap Dividend (ARCA:DIM) make adding broad swaths of mid-sized firms to a portfolio easy. However, individual mid-caps can be attractive on a case-by-case basis, as most professional equity analysts often ignore the space.

Here are a few picks:

Feeding the world's growing population continues to be a chief concern. Mid-cap agriculture processor Bunge (NYSE:BG) is poised to benefit from that trend. The firm is currently trading for below book value and has a cheaper PEG ratio than large-cap rival Archer-Daniels Midland (NYSE:ADM). Bunge has its hands in everything from grains processing to biofuels and currently yields 1.7 percent.

Global fiscal concerns, consolidation and increased demand have all benefited mid-cap or junior gold miners. IAMGOLD (NYSE:IAG) represents an interesting mid-sized play in the sector. The miner has continued to add new supply, and shareholders have recently been rewarded with a 25% increase in the firm's annual dividend.

Recently obtaining dividend aristocrat status, Genuine Parts (NYSE:GPC) distributes a variety of electrical and industrial parts for the automotive and manufacturing sectors. The firm is poised to benefit from increased automobile ownership in emerging markets and recently reported record sales and earnings for Q3 2011. In addition, GPC also delivered its 11th consecutive positive earnings surprise and yields 3.1%. (For more information, check out Dividend Yield For The Downturn.)

Bottom Line
With many analysts predicting slow growth for the new year, investors may want to consider mid-cap stocks for their portfolios. Featuring the right amount of growth and stability, coupled with the recent buyout binge, mid-caps should continue their outperformance.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  2. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  3. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  4. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  5. Investing Basics

    Top Tips for Diversifying with Exotic Currencies

    Is there an opportunity in exotic currencies right now, or are you safer sticking to the major ones?
  6. Mutual Funds & ETFs

    The 3 Biggest Mutual Fund Companies in the US

    Compare and contrast the rise of America's big three institutional asset managers: BlackRock Funds, The Vanguard Group and State Street Global Advisors.
  7. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  8. Professionals

    5 Top-Rated Funds for Your Retirement Portfolio

    Mutual funds are a good choice for emotional investors. Here are five popular funds to consider.
  9. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  10. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  1. How can insurance companies find out about DUIs and DWIs?

    An insurance company can find out about driving under the influence (DUI) or driving while intoxicated (DWI) charges against ... Read Full Answer >>
  2. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  3. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!