Dividend investing: An appealing strategy for wealth accumulation
Mar 20, 2025
Investors may own yield-focused equities for a few primary reasons: to drive the growth of their portfolios, offset the impact of inflation, and provide income. Regular payouts from dividend stocks offer investors the potential to generate a steady income stream. Dividends may also serve as a propellant for compound growth, where reinvesting gains back into your investment strategy can boost portfolio value, playing a key role in achieving long-term financial objectives.
Higher dividends can attract and retain shareholders, particularly in a declining interest rate environment when bond yields fall. Sectors such as energy, real estate, and utilities generally have higher dividend yields as these types of companies depend on stable cash flows and recurring revenue streams from their essential services. Investors may also see these sectors as long-term hedges against inflation as commodity prices and real estate valuations tend to rise with inflation over time.
There may also be companies with appealing valuations, healthy balance sheets, and diverse revenue sources in the financials, industrials, healthcare and consumer sectors, where these stocks may offer sustainable and growing dividends. Even technology and communications services—sectors that don’t often come to mind when thinking about dividends—can contribute to a diversified equity income portfolio. Large tech-oriented companies have been increasing their dividend yields and may also offer additional potential for capital appreciation.
Dividend consistency supports long-term portfolio growth
Dividend yields from S&P 500 companies have declined in recent years alongside the growing market share of technology-oriented companies, which generally pay meager dividends, if any. Still, 80% of S&P 500 companies currently pay dividends and 40% of S&P 500 stocks offer dividend yields over 2%.1
Dividend-focused strategies have historically outperformed across various market conditions, benefiting investors seeking to protect their portfolios as well as those aiming to enhance performance.2 We believe investing in sustainable dividend growers can be a strong long-term approach, and dividend growth stocks may help mitigate losses during market downturns while still capturing proportionate gains during market upswings.
Exhibit 1: Companies that increase their dividends have historically delivered higher returns with lower volatility
Volatility references the standard deviation of returns. Annualized returns from January 1990 through December 2024. The S&P 500 Index is the reference universe for all categories, which we define as: Dividend growers = stocks that have increased their dividends over the preceding 12-month period; Dividend cutters = stocks that have decreased their dividends over the preceding 12-month period; Consistent dividend = stocks that have maintained their dividend payout levels over the preceding 12-month period; No dividend = stocks that have not paid a dividend over the preceding 12-month period. Source: FactSet
Looking way back, dividends have contributed nearly one-third of the total return for U.S. stocks since the 1960s.3 The contribution from dividends has generally been more prominent in periods with lower or negative equity returns, so they’ve often served as a cushion for equity investors during challenging periods.
In the 1990s, dividends were de-emphasized in favor of share buybacks. This shift was intended to accommodate a change in investor preference for capital gains over income, which was consistent with the era’s fixation on high growth. After the dot-com bubble, however, investors once again turned their attention to dividends, with greater appreciation for fundamentals such as P/E ratios and the sustainability of dividend yields.
Exhibit 2: Dividends have been a steady contributor across market environments
*Dividends provided a 1.8% annualized return for the 2000s despite a negative total return for the S&P 500.
As of December 31, 2024. Source: Bloomberg
Dividends can disappear, so seek quality over quantity
Companies can trim, slash, or retire their dividends at any time, although these actions tend to elicit a sharp negative response from investors. When investing in dividend stocks, we believe it is crucial to look for these characteristics:
- History of steady dividend growth: Consistently increasing dividends are generally an indicator of healthy corporate fiscal policy. Over the long term, dividend growers may generate higher returns with less risk than companies that maintain their dividend, pay no dividend, or reduce or eliminate their dividend. See Exhibit 1.
- Low payout ratio: A company that pays out a smaller percentage of its earnings as a dividend retains more financial flexibility to handle unexpected challenges or take advantage of growth opportunities.
- Sustainable current dividend yield: Higher dividends can be a sign of corporate distress or limited growth potential. Dividend paying stocks that offer a combination of yield and consistent dividend growth may reflect superior quality. Stocks with these characteristics may possess the ability to balance payouts with capital reinvestment for future growth initiatives.
Dividend growth is still intact
There are two paradoxical dividend facts about U.S. equity markets: the level of payouts has increased over the course of many decades with relative consistency even as the yield has come down since the early 1980s. How is that possible?
Exhibit 3: Payouts have climbed, but rising stock prices have suppressed yields
As of December 31, 2024. Source: S&P Global
Yields have generally trended lower as stock prices have risen faster than dividends. However, dividends have increased in U.S. dollar terms as companies have become more profitable. Outside of the Global Financial Crisis and Covid eras, the trend of increasing dividends has remained strong.
Investors have historically rewarded dividend discipline, and companies with persistent dividend growth have generally driven competitive returns during periods of market volatility (exhibit 4). Today, more growth-oriented companies have started paying dividends.
Exhibit 4: Consistent dividend growers can play offense and defense
Average total return in various market scenarios
Rolling monthly year-over-year periods from January 1990 through December 2024. Broad stock market performance scenarios are determined by S&P 500 performance. Dividend growers represent S&P 500 stocks that have increased their dividends over the preceding 12-month period. Source: FactSet
Rising interest rates have not weakened the returns of dividend growth strategies
Interest rates have been climbing, with the 10-year U.S. Treasury yield up more than 400 basis points since hitting historic lows in 2020.4 Many investors have become worried that any type of dividend-based equity investment may underperform in a rising rate environment; however, history shows dividend stocks have been relatively resilient.
Exhibit 5: Dividend growth stocks have delivered notable resilience during rising interest rate cycles
Calculated using monthly performance from January 1990 through December 2024. Dividend growers represent S&P 500 stocks that have increased their dividends over the preceding 12-month period. Source: FactSet
Equity Income Strategy at a glance
Fiduciary Trust International’s Equity Income Strategy aims to identify stocks that can provide above-market-average dividend yields, consistent or rising dividend payments, and long-term capital appreciation. The types of companies that can support these objectives tend to be established or emerging leaders with strong competitive advantages, sustainable business models and financial stability.
We seek to invest in companies with attractive sustainable growth characteristics that we believe are not yet reflected in their stock prices. As a result, we tend to favor growth-oriented value stocks.
We’ve designed our Equity Income Strategy to prioritize low turnover, with a target of 20% per year. We would be inclined to buy stocks for the following reasons:
- We believe the stock is undervalued
- The company adheres to its dividend policy and/or continues to grow its dividend
- We have a strong conviction in the company’s investment thesis
- The company appears attractive on a relative value basis
- The company is financially sound and offers a strong balance sheet with low-to-moderate debt levels to reduce dividend risk
Investors seeking higher income or liquidity, lower volatility, or a complement to growth-oriented equity exposures may want to learn more about our Equity Income Strategy
1. According to FactSet data as of December 31, 2024
2. According to FactSet data. Based on the average total return of a dividend-focused strategy versus the S&P 500 Index across various U.S. equity market performance scenarios (as indicated by S&P 500 performance) using rolling monthly year-over-year periods from January 1, 1990 through December 31, 2024. The dividend-focused strategy is composed of S&P 500 stocks that have increased their dividends over the preceding 12-month period. See exhibit 4 for additional details.
3. According to Bloomberg data as of December 31, 2024. U.S. stocks are represented by the S&P 500 Index
4. “Daily Treasury Par Yield Curve Rates.” U.S. Department of the Treasury as of January 31, 2025
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