By Al Root

Over the past 100 years, dividends have been a critical part of the stock market's total return. Not so much anymore.

The S&P 500's dividend yield, at about 1.2%, is near 50-year lows, while the Vanguard High Yield Dividend exchange-traded fund, which includes some 580 stocks yielding an average of 3.9%, has trailed the index by about four percentage points over the past year and 16 percentage points over the past five.

Trivariate Research founder Adam Parker puts the performance in historical perspective: Nonpayers have beaten dividend stocks by some 40 percentage points over the past two years, the worst such performance in 25 years, save the two years ended 2010 and 2021.

The reason isn't hard to suss out. Nonpayers or low payers, including the Magnificent Seven tech stocks, have come to dominate the market, while sectors with traditionally reasonable payouts, such as healthcare and staples, have lagged behind.

There is good news for investors seeking income, however. Dividend fundamentals are solid. Almost 70% of payers have increased dividends over the past year, and only 5% have cut them. That's in line with historical averages, suggesting little economic stress on payers.

What's more, S&P 500 dividends are on pace to grow 5% in 2025. "Dividend fundamentals remain robust, supported by low double-digit percentage earnings growth expected this year and next, healthy corporate balance sheets, expansionary fiscal and easing monetary policy, and elevated buyback activity," says J.P. Morgan strategist Brian Kaplan.

Still, it hasn't translated into market-beating stock performance. Trivariate's Parker recommends a different approach than piling into high-yielders. Instead, investors should look for companies with low payout ratios and the ability to raise dividends via earnings growth, a sign that they have ample net income to pay out more to shareholders.

S&P 500 companies have paid out about $720 billion in dividends over the past 12 months, almost 40% of reported net income, according to Bloomberg. The index is expected to grow earnings by about 12% in 2025 and another 13% in 2026. So to meet Parker's criteria, companies with a penchant for increasing payouts need to pay less than 40% of net income as dividends and have market-like expected earnings growth.

He identified 15 stocks that fit the bill, including gold miner AngloGold Ashanti, life insurance provider F&G Annuities & Life, student loan provider Nelnet, industrial and healthcare technology provider Roper Technologies, drug distributor Cencora, movie house Cinemark Holdings, gas transporter Navigator Holdings, bank Capital One Financial, regional bank Western Alliance Bancorp, defense systems integrator Leidos Holdings, utility Vistra, data storage company Western Digital, workwear provider UniFirst, financial services company UMB Financial, and LNG producer Cheniere Energy.

Those stocks have all grown or initiated dividends over the past 12 months and pay out less than 30% of net income on average. They are also expected to grow earnings at an average of 20%-plus in 2026, leaving more room for dividend growth.

On the downside, they yield an average of 1.5%, which is better than the S&P 500 but worse than the 2.4% average yield for dividend payers in the index. Parker's list has one other advantage, though: valuation. The 15 stocks trade for an average of just 14 times estimated 2026 earnings, a big discount to the 20 times ratio for dividend payers in the S&P 500.

Dividends may never return to being the go-to place to get stock returns -- "Maybe, eventually," says Parker -- but you don't have to wait for them to be popular again to make them work in your portfolio. B

Write to Al Root at allen.root@dowjones.com

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November 20, 2025 02:00 ET (07:00 GMT)

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