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The surprising truth about dividend growth stocks

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  Published in Stocks and Investing on Tuesday, September 16th 2025 at 6:43 GMT by Seattle Times
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The Surprising Truth About Dividend‑Growth Stocks

For decades, the idea that a company that raises its dividend every year must be a winner has sat comfortably on the shelves of Wall Street’s “defensive” investment playbooks. The image of a firm that never cuts its payout has become shorthand for reliability, steady cash flow, and a lower‑risk profile. That narrative, however, is being challenged by fresh data, new research, and a closer look at the mechanics that actually drive the “dividend‑growth” screen.

What Is a Dividend‑Growth Stock?

In its simplest form, a dividend‑growth stock is a firm that has increased its dividend for a set number of consecutive years—often a decade or more. The logic is straightforward: a history of consistent dividend hikes signals a company’s confidence in its earnings and a willingness to share that confidence with investors. Many index funds and ETFs that target “quality” or “defensive” sectors (think utilities, consumer staples, and healthcare) rely on this rule of thumb to pick holdings.

The Seattle Times article points out that the most common approach to building a dividend‑growth portfolio involves a tri‑criteria filter: a company must have a long dividend history, a reasonable payout ratio (typically under 70 %), and a track record of earnings growth. The result is a universe of blue‑chip firms that, on paper, should deliver a smoother ride than the broader market.

The Reality Behind the Numbers

The article cites a recent study by a leading quantitative research firm that compares the performance of dividend‑growth stocks to the broader S&P 500 over the past twenty years. The findings are eye‑opening: while dividend‑growth firms outperformed the market by a modest 0.4 % annually from 2000 to 2019, they fell behind by an average of 3 % per year from 2020 to 2022. This reversal coincided with a sharp spike in valuations, a wave of tech dominance, and the macro‑shock of a global pandemic.

“It’s not that dividend‑growth stocks are doomed,” a senior analyst quoted in the piece says, “but the narrative that they are inherently safer has been overstated.” In the post‑pandemic environment, high‑growth, high‑valuation tech stocks have pulled the S&P 500, while many traditional dividend‑growth names have become more vulnerable to rising interest rates and supply‑chain disruptions.

Why the Shift Happened

Several forces converge to explain the recent underperformance:

1. Valuation Compression
   The dividend‑growth screen often pulls a lot of cash‑rich companies that already trade at lofty multiples. When the market turns, those high multiples can become a liability rather than an asset.

2. Payout Ratio Traps
   A firm’s willingness to raise dividends may come at the cost of reinvestment. Companies with a payout ratio approaching 70 % leave little room to fund new projects or navigate downturns, potentially stunting long‑term growth.

3. Sector Concentration
   Traditional dividend‑growth portfolios are heavy in a handful of sectors (utilities, consumer staples, real estate). Those sectors tend to underperform in a rate‑hike cycle, as borrowing costs rise and consumer discretionary spending cools.

4. Macro‑Risk Misreading
   The pandemic accelerated a shift toward high‑yield, high‑growth companies. Dividend‑growth stocks, many of which are perceived as defensive, have been caught in the cross‑fire of a risk‑on environment followed by a risk‑off pivot.

The Human Element: Corporate Behavior

The article also follows a link to an interview with a corporate finance executive who explains how dividend policy decisions are rarely a pure reflection of earnings quality. “We consider strategic factors—like whether a dividend is a signal to the market, how it affects our credit rating, or whether it’s a tool to anchor our capital structure,” she says. The takeaway is that dividend growth is as much a managerial choice as it is a financial metric.

What Investors Should Do

Given the new evidence, the article recommends a more nuanced approach:

• Blend Growth and Value
  Instead of pure dividend‑growth screens, consider adding a value overlay (e.g., price/earnings or price/book ratios) to pull companies that are still trading at reasonable multiples.

• Diversify Across Capital Structures
  Include companies with different payout ratios and capital‑allocation philosophies. A mix of “high‑growth, low‑dividend” and “steady‑growth, high‑dividend” can balance risk.

• Monitor Payout Trends
  Watch for changes in payout ratios. A sudden uptick may indicate a company’s intention to maintain or increase dividends, which can signal confidence or an attempt to chase valuations.

• Stay Informed About Macro Dynamics
  Keep an eye on interest‑rate cycles, inflation expectations, and geopolitical risks. These variables disproportionately affect the sectors that dominate dividend‑growth portfolios.

• Use a Tactical Approach
  Rather than committing to a static screen, consider a tactical asset‑allocation strategy that weights dividend‑growth stocks when the macro outlook is favorable and tilts away when rates rise.

The Bottom Line

The “surprising truth” about dividend‑growth stocks, as the Seattle Times article frames it, is that their performance is not a guaranteed safety net. When valuations are normal and the economy is stable, they can be an attractive component of a diversified portfolio. But in periods of market volatility, rising rates, and shifting investor sentiment, they can underperform the broader index. Investors who were once drawn to the comforting notion of “never‑cut” dividends may need to broaden their perspective, adding a layer of macro awareness and sector diversification to keep their portfolios resilient.

In a market that is increasingly complex, the story of dividend growth has moved from a simple rule to a nuanced strategy that requires constant reassessment and a willingness to balance tradition with new data.