Balancing Act: Dividend Stability vs. Valuation Risks in BMO's US Mid Cap ETF (ZMID.TO)

The BMO S&P US Mid Cap Index ETF (ZMID.TO) has long been a go-to vehicle for investors seeking exposure to the growth potential of U.S. mid-cap companies. But in today's uncertain market environment, the ETF faces a critical tension: its dividend stability appears intact for now, yet its elevated valuation clouds its long-term appeal. For income-focused investors, ZMID.TO presents a nuanced opportunity—one that demands careful consideration of both its dividend resilience and the risks posed by its pricey multiple.

Dividend Stability: A Fragile Consensus

ZMID.TO's dividend yield has undergone significant turbulence over the past five years, reflecting the volatility inherent in mid-cap equities. After hovering between CAD 0.10 and 0.15 per quarter from 2020 to 2022, the ETF's payout surged to CAD 0.21 in late 2023—only to crash by a third to CAD 0.13 in early 2024. The dividend has since stabilized at this level, with the most recent quarterly payout of CAD 0.13 in June 2025 signaling a temporary calm. However, the forward yield has plummeted to 1.17%, down from a peak of 2.1% in recent years, as share prices (currently trading at CAD 44.53) outpace dividend growth.

This stability is not without merit. A subset of the ETF's holdings—such as the S&P MidCap 400 Dividend Aristocrats—boasts a track record of resilience. Companies like Consolidated Edison (ED) and Automatic Data Processing (ADP), which require at least 15 years of consecutive dividend increases, maintain payout ratios below 80% and robust balance sheets. These firms act as ballast in ZMID.TO's portfolio, shielding it from the broader mid-cap market's whims. Meanwhile, sectors like utilities and industrials, which account for nearly 30% of the index, offer predictable cash flows. Valero Energy (VLO), a top holding, raised dividends by 6% in early 2025 while maintaining a prudent 63% payout ratio.

Yet this stability comes at a cost. The ETF's forward price-to-earnings ratio of 35.59—far above the historical average for mid-caps—hints at overvaluation. With the S&P MidCap 400 index posting a -3.83% return year-to-date through May 2025, driven by declines in healthcare and policy uncertainty, investors must ask: Can dividends keep pace with this premium?

Valuation Risks: The Elephant in the Room

The mid-cap space is a double-edged sword. While smaller than large caps, mid-caps lack the scale to weather downturns as effectively. ZMID.TO's high P/E ratio suggests investors are betting on future growth, but this optimism may be misplaced. The ETF's dividend growth has averaged just 7.38% over the past three years, lagging behind its valuation expansion. If earnings disappoint—a distinct possibility in a slowing economy—the current dividend stability could erode quickly.

Sector divergence further complicates the picture. Utilities and financials—20% of the index—are holding up, but healthcare (23%) and technology face margin pressures. These sectors' struggles highlight the ETF's vulnerability to sector-specific headwinds, which could drag down returns even if dividends remain intact.

Navigating the Tradeoff: A Hold with Caveats

For income investors, ZMID.TO's current dividend stability is a mixed blessing. The 1.17% yield, while modest, offers a safer harbor compared to high-yield ETFs chasing riskier payouts. Pairing ZMID.TO with utilities or REITs could diversify income streams while tempering volatility. However, the ETF's high valuation demands caution.

The key question is this: Can mid-caps sustain their dividend discipline in a low-growth environment? The Dividend Aristocrats within the portfolio suggest yes—but only if their sectors avoid prolonged declines. Meanwhile, the broader index's struggles underscore that ZMID.TO is not a pure income play.

Final Take: Hold with a Watchful Eye

ZMID.TO remains a “hold” for conservative income portfolios, provided investors accept its limitations. The ETF's dividend stability is real but unexciting, and its valuation introduces a ceiling on upside potential. For long-term holders, a 5–10 year horizon may allow the Dividend Aristocrats to shine, but short-term traders should tread carefully.

The ETF's CAD 0.13 quarterly payout signals current calm, not growth. Investors must monitor two critical factors: the S&P MidCap 400's ability to rebound from its year-to-date slump and whether ZMID.TO's P/E ratio moderates. Until then, this ETF is best viewed as a defensive core holding—not a growth engine.