The dividend growth universe is changing

FILE - This Oct. 24, 2016 file photo shows dollar bills in New York. (AP Photo/Mark Lennihan, File)

Dividend growth investing isn’t about maximizing current income, nor should it be confused with traditional growth investing. In fact, the Morningstar US Dividend Growth Index currently falls on the value side of the US stock market.

What is a dividend growth strategy? You might hear it pitched as a “quality”-focused investment approach, with “defensive” characteristics. Companies growing their payouts to shareholders are, in theory, financially secure. Their competitive positions are generally strong, even strengthening. By reputation, dividend growth stocks are less volatile than the broad market. These attributes have attracted billions in investor capital to funds with “dividend growth” in their names.

Yet, dividend growth stocks have underperformed the broad US equity market over the past decade. They have not lagged as far behind as the high-yield section of the market, but as a group they’ve failed to keep up. Let’s look at what’s behind their struggles.

Not Everything You Hear About Dividend Growth Stocks Is True

The Morningstar US Dividend Growth Index includes large-, mid-, and small-cap companies with a five-year history of increasing their cash payouts to shareholders. To be in the index, companies must display positive consensus earnings forecasts and must have a payout ratio under 75%. As of July 2025, 397 US companies met the index criteria.

The Morningstar US Dividend Growth Index and other dividend growth strategies score below the broad stock market on measures of corporate “quality” today. Dividend growth stocks currently lag the Morningstar US Market Index in profitability, financial strength, and returns on capital.

How can this be? Comparing the top 10 constituents of the Morningstar US Dividend Growth Index to those of the broad equity market as represented by the Morningstar US Market Index shows how concentrated the “broad” market has become in key technology and tech-adjacent companies—only a few of which are dividend growers.

The dividend growth index excludes phenomenally profitable stocks Nvidia NVDA, Amazon.com AMZN, Alphabet GOOGL, and Meta META. It includes Microsoft MSFT but at less than half the market weight. These lighter exposures help explain the “quality” gap.

They also help explain the underperformance. The biggest factor in the dividend growth index’s lagging returns is its below-market weight to technology stocks. The second-biggest factor is excluding Alphabet and Meta.

How Has the Market’s Dividend Growth Profile Changed?

Paying a dividend is a sign of maturation. When Meta and Alphabet initiated quarterly payouts to shareholders in 2024, it signaled they were entering a new life stage. Of the largest 10 stocks in today’s market, only Amazon, Berkshire Hathaway BRK.B, and Tesla do not pay dividends.

Tech stocks are growing dividends more than in the past, with Microsoft as the index’s top constituent. Ten years ago, tech stocks were roughly 12% of the dividend growth index; they now approach 20%. That’s still well behind their share of the broad US stock market, which surpasses one third.

The financial services and healthcare sectors also have grown richer in dividend growth.

While industrials stocks still represent above-market exposure for the index, its share of the dividend growth universe has fallen over time (with the aerospace and defense industry an important exception). Consumer-related stocks also represent a smaller part of the universe than they once did, though Procter & Gamble PG and Home Depot HD remain top 10 constituents, and both Coke KO and Pepsi PEP make the top 20.

Sectors like utilities, energy, and basic materials also remain an important part of the dividend growth universe.

What Does This Mean for Dividend Growth Investors?

As a group, dividend growers currently lag the overall market on measures of “quality.”

But that doesn’t mean dividend growers aren’t healthy businesses. What’s more, they’re trading at lower multiples than dividend-light growth stocks.

What’s encouraging is that dividend growth has delivered a smoother ride than the broad market. Even if it doesn’t always live up to its reputation for “quality,” dividend growth investing can stake a valid claim at being a “defensive” strategy.

Companies growing their dividends remain a perfectly reasonable route to equity market participation, especially for risk-averse investors.

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This article was provided to The Associated Press by Morningstar. For more personal finance content, go to https://www.morningstar.com/personal-finance

Dan Lefkovitz is a strategist for Morningstar Indexes.