Why Dividend-Growth Stocks Aren’t Just for Income Investors (The Morning Filter Excerpt)

Dividend Growth Investing: An Analysis of Recent Trends & Performance

Key Concepts:

• Dividend Growth Investing: A strategy focused on companies consistently increasing dividend payouts to shareholders.
• Dividend Yield: The annual dividend payment expressed as a percentage of the stock price.
• Morningstar US Dividend Growth Index: A benchmark tracking the performance of US companies with a history of increasing dividends.
• Economic Moats: A company’s ability to maintain competitive advantages over its rivals, protecting its long-term profits.
• High Dividend Stocks: Stocks with a relatively high dividend yield, often associated with mature, slower-growth companies.
• Equities: Stocks or shares of ownership in a company.

I. Understanding Dividend Growth Investing

Dividend growth investing centers on identifying companies that demonstrate a consistent commitment to increasing their dividend payouts. Dan Leavitz explains this isn’t about seeking the highest current dividend yield, nor is it solely focused on high-growth stocks. Instead, it’s a strategy geared towards identifying “high quality companies with strong competitive positioning, maybe even economic moats.” The core idea is that companies increasing dividends are typically financially strong and have improving prospects. This approach is also recognized for its “defensive orientation,” meaning it tends to be less volatile than the broader equity market.

II. Performance in 2025 & the Impact of AI

While US dividend stocks generally lagged in 2025, dividend growth stocks also underperformed the broader US market by “a few percentage points” according to the Morningstar US Dividend Growth Index. Leavitz attributes this relative underperformance, in part, to the rise of Artificial Intelligence (AI) stocks. He states, “Absolutely. [we] blame AI for that,” highlighting the market’s strong preference for growth in the technology sector. However, dividend growth stocks have demonstrated greater stability during market sell-offs, including those experienced in 2022, 2018, and earlier in 2025 related to the AI trade.

III. The Evolving Dividend Growth Universe: Technology’s Increasing Role

A significant evolution within the dividend growth stock universe is the increasing presence of technology companies. Leavitz acknowledges the common perception that Silicon Valley culture isn’t traditionally focused on dividends, but clarifies this is an “oversimplification.” Several prominent tech firms are now included in dividend growth indexes, including:

• Apple: A well-established dividend payer.
• Microsoft: Another technology leader with a dividend.
• Applied Materials: A company involved in materials engineering.
• Broadcom: A semiconductor manufacturer featured in multiple dividend indexes.
• Oracle: A technology company also paying dividends.

These companies typically offer lower dividend yields compared to traditional high-dividend stocks, positioning them more firmly within the “dividend growth” category.

IV. Investor Expectations & Future Performance

The inclusion of more technology companies in the dividend growth universe necessitates adjusted expectations for investors. Leavitz predicts that dividend growth investing will continue to deliver performance “in between the market and the high dividend paying section of the market.”

Specifically:

• When high-dividend stocks outperform: Dividend growth will likely lag the market but perform better than high-yielding equities.
• When the market performs strongly: Dividend growth will likely trail the market but outperform high-yielding equities.

This suggests a more “marketlike” performance profile, offering a balance between growth potential and relative stability.

V. Technical Vocabulary

• Payout Ratio: The percentage of a company’s earnings paid out as dividends. (Not explicitly mentioned, but relevant to the discussion).
• Volatility: The degree of variation of a trading price series over time, as measured by the standard deviation of the asset's returns.
• Index ETF: Exchange Traded Fund that tracks a specific market index.
• Actively Managed Fund: A fund where a portfolio manager makes investment decisions with the goal of outperforming a benchmark.

Conclusion:

The conversation highlights that dividend growth investing remains a viable strategy, particularly for investors seeking a balance between income and stability. The increasing inclusion of technology companies within this universe is a notable trend, requiring investors to adjust their expectations regarding performance. While dividend growth stocks may not consistently outperform the broader market or high-dividend stocks, they offer a potentially less volatile investment option with a focus on companies demonstrating financial strength and a commitment to returning value to shareholders through increasing dividend payouts.