Market Cap: Fast Guide for New Investors

What it is
Market cap = share price × shares outstanding.
It’s the market’s snapshot of value. Not assets. Not revenue. Not profits.

Why you should care
Size sets expectations. It tells you about risk, growth, stability, and how a stock might behave in a selloff.

The Size Map (rules of thumb)

• Large-cap ($10B+): durable, steadier, often pay and grow dividends. Lower blow-up risk. Slower growth.
• Mid-cap ($2–10B): more growth, more volatility. Mixed on dividends.
• Small-cap (<$2B): highest upside, highest drawdowns. Income less reliable.

Use this map to set allocation. More large-cap for safety. More small/mid for growth. Match it to your horizon and sleep level.

Dividend Lens: What Size Signals

Large caps fund dividends through cycles. Mid/small caps often reinvest first.
Don’t chase yield. Judge coverage and repeatability.

Core checks before you buy:

• Payout ratio (EPS for regular C-corps; AFFO for REITs). Look for room to reinvest.
• Free cash flow vs. dividend. Cash pays dividends, not accounting hopes.
• Balance sheet (net debt, interest coverage). Weak balance sheets cut first.
• Dividend growth record (years raised, cadence, % growth).

REITs are different

• Use AFFO payout, not EPS.
• Taxes: many REIT payouts are ordinary income.
• Example: Realty Income (O) runs a mid-70% AFFO payout (as of Sept 15, 2025 per IR). That’s generally fine. Size helps, but coverage matters more.

Examples (as of 2025; company IR/filings)

• Johnson & Johnson (JNJ) — Dividend King, 63 raises. ~35–60% EPS payout band. Large, diversified. Dividend cushion comes from scale.
• Procter & Gamble (PG) — 69 years raised. ~62% EPS payout. Brands and pricing power fund the check.
• Coca-Cola (KO) — 63 raises. ~70% EPS payout; 3-yr FCF payout <80%. Works, but watch the line.
• Walmart (WMT) — King, ~52 raises. Mid-30s% payout. Lower yield, high safety.
• McDonald’s (MCD) — Aristocrat, ~49 raises. ~60% payout. Still invests. Still grows.

These are examples, not picks. Point is simple: big, cash-rich, disciplined wins for dividend durability.

Myths to trash

• “Big cap = no growth.” Slower, yes. Dead, no. Compounding still works.
• “Market cap drives dividends.” No. Earnings + board policy drive dividends. Price moves don’t change the dollar check.
• “Small caps always win.” Not for income. Higher failure rates and cuts.

Total Return > Yield

Your result = dividends + price change (and what you reinvest).
A 2–3% yield that grows 6–8%/yr can beat a 7–10% headline yield that bleeds NAV.

Ex-div 101: on the ex-div date, price usually drops about the dividend. Normal mechanics. Not a real loss in total return.

How to actually use market cap (process)

1. Set your mix by risk
   • Long horizon / want sleep: tilt large-cap.
   • Need upside / can handle swings: add mid/small in measured size.
2. Screen for dividend quality
   • Kings/Aristocrats first pass.
   • Throw out stretched payouts and serial cutters.
3. Do the cash math
   • FCF covers the dividend and leaves reinvestment room.
   • For REITs, AFFO payout in a sane band.
4. Check balance sheet
   • Net debt, maturities, interest coverage. Rising rates punish weak credits.
5. Demand growth
   • Revenue, FCF, and dividend growth. A flat dividend loses to inflation.
6. Price last
   • Reasonable multiple vs. its history and peers. Don’t pay top-tick for safety.

Allocation sketch (illustrative, not advice)

• 60–75% large-cap dividend growers (quality, wide moats).
• 15–25% mid-cap compounders (measured).
• 0–10% small-cap (optional; treat as risk budget).
• 0–20% REITs with sane AFFO payout.
  Rebalance annually. Reinvest by default unless you need cash.

Red flags to avoid

• Headline “double-digit yields” without cash coverage.
• Option-income / premium funds marketed on yield alone. Many just harvest volatility and return capital. Yields get cut when conditions change.
• Payout ratios creeping up to “no room” levels.
• Debt rising while the dividend rises faster. That’s a tell.

Quick checklist (print this)

• Market cap fits my risk bucket
• Dividend coverage (EPS or AFFO) is healthy
• FCF supports dividend and reinvestment
• Balance sheet can handle a shock
• Dividend growth record is real
• Valuation is reasonable vs. history/peers
• I’m not chasing a headline yield

Bottom line

Start with market cap to set expectations.
Buy cash-rich, disciplined dividend growers.
Measure safety first, then growth, then price.
Reinvest. Let time do the compounding.
Ignore yield bait. Focus on total return.

Educational, not investment advice. Do your own work.