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The surprising truth about dividend growth stocks - AP News

📈 Dividend growth investing focuses on companies with growing payouts rather than maximizing current income or aligning purely with traditional growth strategies.

🛡️ The strategy targets financially secure firms with strong competitive positions, lower volatility, and defensive characteristics compared to the broader market.

📉 Despite these attributes, dividend growth stocks have underperformed the broad US equity market over the past decade.

🏗️ The Morningstar US Dividend Growth Index includes large-, mid-, and small-cap companies with a five-year history of increasing cash payouts.

⚖️ As of July 2025, the index criteria required positive earnings forecasts and a payout ratio under 75%, resulting in 397 qualifying US companies.

📊 Current data shows dividend growth indexes score below the broad market on profitability, financial strength, and returns on capital.

⚙️ A key reason for this quality gap is the low weight of technology stocks in the index compared to their heavy presence in the broad market.

🚫 The index excludes top tech winners like Nvidia, Amazon, Alphabet, and Meta, while including Microsoft at less than half its market weight.

💰 Paying dividends signals corporate maturation, with only Amazon, Berkshire Hathaway, and Tesla among the largest 10 stocks currently dividend-free.

📈 Technology stock exposure in the index has grown from 12% to nearly 20% over ten years, though it still trails their one-third share of the broad market.

🏥 Financial services and healthcare sectors have become more significant components within the dividend growth universe.

⚙️ Industrials stocks still hold above-market exposure, though aerospace and defense remain notable exceptions to this trend.

🍫 Consumer-related stocks represent a smaller portion now than historically, though Procter & Gamble and Home Depot remain top constituents.

🔋 Sectors including utilities, energy, and basic materials continue to play an important role in the dividend growth strategy.

💎 Although they lag on quality measures overall, dividend growers are healthy businesses trading at lower multiples than dividend-light growth stocks.

🛡️ The strategy delivers a smoother ride than the broad market, supporting its claim as a defensive investment approach despite reputation gaps.

✅ Companies that grow dividends offer a reasonable route to equity participation, particularly suitable for risk-averse investors.

Bullish Signals
  • Dividend growth companies are financially secure with strong competitive positions, characterized by defensive attributes and lower volatility compared to the broad market.
  • The strategy includes 397 US companies as of July 2025 that display positive consensus earnings forecasts and maintain a payout ratio under 75%.
  • Microsoft MSFT is the top constituent of the Morningstar US Dividend Growth Index, providing significant exposure to a quality technology leader.
  • Technology stocks now represent approximately 20% of the dividend growth index compared to only 12% ten years ago, showing increasing representation in a previously underweight sector.
  • Many of today's largest profitable tech stocks like Alphabet and Meta have initiated quarterly payouts in 2024, signaling they are entering a new life stage as stable cash generators.
  • Dividend growers remain healthy businesses that are trading at lower multiples than dividend-light growth stocks, offering an attractive valuation opportunity.
  • The strategy has delivered a smoother ride than the broad market, validating its claim as a defensive investment approach suitable for risk-averse investors.
Risk Factors
  • The Morningstar US Dividend Growth Index has underperformed the broad US equity market over the past decade, failing to keep up despite its reputation for stability.
  • Dividend growth stocks currently lag the Morningstar US Market Index on key quality metrics including profitability, financial strength, and returns on capital as of July 2025.
  • Microsoft MSFT is included in the index but carries less than half the market weight compared to major tech peers like Nvidia NVDA, Amazon.com AMZN, Alphabet GOOGL, and Meta META which are excluded.
  • The top 10 stocks in the broad equity market exclude several of the most profitable companies, including Meta and Alphabet, despite their entry into quarterly payouts starting in 2024.
  • Tech stocks represent only around 20% of the dividend growth index today, significantly trailing their share of the broader US stock market which surpasses one third.
  • Concentrated holdings in non-dividend-paying mega-cap tech and recent additions to the high-yield section may indicate shifting dynamics that could affect traditional dividend growth strategies.
Full Analysis
This article from AP News, provided by Morningstar, examines the performance and characteristics of dividend growth investing as represented by the Morningstar US Dividend Growth Index. Contrary to popular perception, the index currently falls on the value side of the US stock market rather than being purely growth-oriented, yet it has underperformed the broad US equity market over the past decade. The strategy is defined as a quality-focused, defensive approach seeking companies with a five-year history of increasing cash payouts, positive earnings forecasts, and payout ratios under 75%. As of July 2025, 397 US companies met these criteria within the index. Despite their reputation for financial security and lower volatility, dividend growth stocks currently lag the Morningstar US Market Index on key measures of corporate quality, including profitability, financial strength, and returns on capital. This underperformance is largely attributed to a concentration issue: the broad market has become heavily concentrated in key technology companies, while the dividend growth index maintains lighter exposures to this sector to exclude non-dividend payers like Nvidia, Amazon, Alphabet, and Meta. While Microsoft (MSFT) is included as the top constituent, its weight is less than half that of its representation in the broader market, which currently accounts for over one-third of broad US stock holdings compared to approximately 20% of the dividend growth index. The composition of the index reflects shifts in the corporate landscape, particularly among large-cap technology and financial services companies. Notable inclusions such as Procter & Gamble, Home Depot, Coca-Cola, and Pepsi remain top constituents, while utility, energy, and basic materials sectors continue to form an important part of the universe. The article concludes that while dividend growers may not always match the "quality" metrics of the broader market due to structural exclusions of high-growth tech firms, they trade at lower multiples and offer a smoother ride, making them a valid defensive strategy for risk-averse investors seeking equity participation.