Dividend-paying stocks tend to hold up better than the overall market during volatile times and economic slowdowns. But many large-cap blue-chip dividend payers such as McDonald’s and Procter & Gamble have already experienced big gains over the past year, so they may not provide the downside protection you would expect.

Better defensive strategy: Invest in dividend-paying medium-sized companies—those with stock market values between $2 billion and $10 billion. Their businesses are mature enough to pay reliable dividends but still have the ability to grow much faster than large companies. Also, their stocks are bigger bargains.

To find attractive dividend-paying mid-cap stocks: Look for companies with steady recurring revenues…little or no debt… leading market positions in their niches…and strong enough cash flow to increase dividends at least 10% annually for the next five years. Dividend growth is the best indication that earnings are growing and that management believes they will continue to grow.

Two mid-cap stocks in my fund’s portfolio that meet these criteria…

First Hawaiian (FHB). Hawaii’s oldest and largest bank controls much of the state’s consumer and commercial deposits and loans with little competition, allowing it to maintain strong profit margins. Real estate prices in Hawaii have much less volatility than elsewhere in the US, greatly reducing the bank’s exposure to mortgage defaults in bad times. Recent yield: 3.8%.

Monro (MNRO) operates a network of 1,400 automotive service stations in 30 states, offering brake, steering and other undercar repairs. It does well in slowing economies as drivers try to squeeze more life out of older ­vehicles. Monro has developed a niche between expensive car-dealer service operations and small auto-mechanic shops. Recent yield: 1.12%.

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