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The surprising truth about dividend growth stocks - WTOP News

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  Published in Stocks and Investing on Tuesday, September 16th 2025 at 12:20 GMT by WTOP News
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The Surprising Truth About Dividend‑Growth Stocks

For years investors have treated dividend‑growth stocks like a “two‑for‑one” proposition: steady income that also appreciates in value. The idea is simple—buy a company that has consistently raised its dividend for at least 25 years, and you get a cushion against market downturns while still benefiting from upside potential. The WTOP‑LIFE article, “The Surprising Truth About Dividend‑Growth Stocks,” dives deep into the data, challenges the conventional wisdom, and offers a more nuanced view of what makes—or breaks—these favorites.

1. The Myth of Unconditional Safety

The article opens with a quick recap of the classic dividend‑growth “rules” that have guided both institutional and retail investors for decades:

1. Dividend Growth Rate (DGR) ≥ 5 %
2. Payout Ratio ≤ 55 %
3. Stable Earnings Growth

The author then questions whether those thresholds really guarantee safety. Using data from the S&P 500 Dividend Aristocrats (linked to Investopedia’s primer on the index), the piece shows that many of the “staple” dividend‑growth stocks have begun to lag in both earnings and DGR in recent years. While the average DGR for the Aristocrats hovered at 8 % in the 2015‑2019 window, the 2020‑2024 window saw a dip to just 4.7 %. In other words, the “growth” has slowed.

The article also points out that the dividend‑growth universe is no longer as homogeneous as it used to be. The top 25% of growth‑rate performers are now disproportionately concentrated in a handful of sectors—namely consumer staples and utilities—while other sectors such as technology and industrials are either stagnant or declining.

2. The Hidden Costs of a “Growth‑First” Mentality

The author examines the “growth‑first” approach that many investors adopt when chasing high DGRs. A key point is the trade‑off between dividend sustainability and earnings flexibility. Companies that pour large percentages of earnings into dividends can find themselves in a precarious position when earnings slow down.

An example highlighted in the article is Coca‑Cola (KO). For decades, KO was the poster child for dividend‑growth. Yet the company’s payout ratio sits at 83 %—well above the “safe” 55 % benchmark. In 2024, Coca‑Cola’s earnings were down 6 % year‑over‑year, yet the company still increased its dividend by 3 %. The article links to a Bloomberg profile on KO that discusses how the company’s dividend increase was financed largely by a share repurchase program, which could prove unsustainable if earnings don’t rebound.

Another case study involves Johnson & Johnson (JNJ), which is cited as a “classic” dividend‑growth stock. The article notes that while JNJ’s DGR is healthy at 7 %, the company’s payout ratio has been creeping upward to 62 %. The piece stresses that even “safe” dividend growth stocks are not immune to macroeconomic headwinds such as inflationary pressure on raw materials or geopolitical risks that affect global supply chains.

3. The Real Metric—Return on Capital (ROC)

The article pivots to a deeper metric: Return on Capital (ROC). While DGR and payout ratio are important, ROC gives investors insight into how effectively a company is generating profits from its invested capital. A high ROC often translates into sustainable dividends and higher stock price appreciation.

The author cites a recent Morningstar research note (linked in the article) that shows dividend‑growth stocks with ROC above 15 % have outperformed those below that threshold by roughly 1.5 % annually over the past decade. This performance advantage persists even during market downturns, suggesting that ROC is a stronger predictor of both dividend sustainability and capital appreciation than DGR alone.

4. The Impact of Macroeconomic Shifts

One of the most compelling sections of the article examines how recent macro trends are reshaping the dividend‑growth landscape:

• Inflation and Interest Rates: Rising rates have tightened corporate profit margins, especially in sectors with heavy capital expenditures such as utilities and telecoms. The article links to a Federal Reserve research brief that forecasts a 0.2 % contraction in earnings for dividend‑growth stocks in the next 12 months.

• Technological Disruption: While tech companies have historically been excluded from the dividend‑growth universe, the article notes that a growing number of tech firms—e.g., Microsoft (MSFT) and Apple (AAPL)—are now paying dividends, raising questions about how to assess their sustainability. An investment research piece from Seeking Alpha is linked, highlighting that these tech dividends are financed by massive cash reserves, making them less reliant on earnings growth.

• Global Supply Chain Disruptions: The article highlights how disruptions in China and the U.S. supply chains have hit earnings for many consumer staples. A piece from Reuters (linked in the article) details how a 5 % increase in raw‑material costs can erode earnings by 1‑2 %, impacting dividend sustainability.

5. Strategies for the Modern Dividend‑Growth Investor

The article concludes with a set of actionable take‑aways that challenge conventional “one‑size‑fits‑all” advice:

1. Diversify Across Sectors: Don’t just stack your portfolio in consumer staples. Look for companies with strong ROC in sectors like healthcare and industrials, where earnings are often more cyclical but can be more resilient during recessions.

2. Focus on Dividend‑Growth Quality: Use a composite score that blends DGR, payout ratio, ROC, and earnings quality metrics such as free cash flow (FCF). The article references a free‑to‑use calculator from ETF.com that ranks dividend‑growth stocks on these criteria.

3. Beware of “Dividend Aristocrats” Labels: Just because a company has been a dividend aristocrat for decades doesn’t guarantee future performance. Look for companies that have maintained or improved their ROC over the last 5‑year period.

4. Consider Dividend‑Growth ETFs: The article briefly mentions the new SPDR S&P Dividend Growth ETF (SDIG) (linked to an ETF.com article). This fund invests in high‑quality dividend‑growth stocks with a focus on sustainability and has a lower expense ratio than many actively managed alternatives.

5. Watch for Payout Ratio Adjustments: A sudden spike in payout ratio—especially one that is not accompanied by a corresponding increase in free cash flow—can be a warning sign. The article suggests setting a threshold, such as 60 %, beyond which you reevaluate the stock.

6. Bottom Line

The “surprising truth” is that dividend‑growth stocks are not a guaranteed safe haven. Their performance depends on a complex interplay of earnings quality, capital allocation, macroeconomic conditions, and sector dynamics. For the modern investor, a sophisticated approach that incorporates ROC, earnings quality, and payout sustainability offers a better chance of achieving both income and upside.

The WTOP‑LIFE piece ultimately encourages readers to look beyond the headline metrics and to dig deeper into the financial statements, sector trends, and macro drivers that truly determine whether a dividend‑growth stock will continue to thrive—or falter—in the years ahead.