By Spencer Jakab

This column originally appeared in the WSJ's Markets A.M. newsletter. You can sign up here to receive it in your inbox every weekday.

It's one of the most successful investing strategies, but you can easily do better.

Dozens of funds and hundreds of billions of dollars of conservative investors' savings have been deployed in the belief that companies that steadily increase their dividends over time have been the best market performers in the long run.

The dividend growth tail sometimes wags the dog: The list of 69 S&P 500 Dividend Aristocrats, for example, includes companies that have raised payouts for at least 25 years. When management teams decide they can't raise them by even a penny -- Pfizer, General Electric, AT&T and Walgreens all lost the crown -- they have been punished. Exxon Mobil tied itself in knots five years ago to keep the distinction, doing so by a whisker.

Dividends have become less important over the decades, but they are hardly extinct. Ed Clissold of Ned Davis Research points out that more than four-fifths of companies in the S&P 500 pay one, and that 324 either grew or initiated them in the past year.

Though not intentionally, it was some research years ago from his firm that stoked the obsession with dividend growers. Using an older technique for calculating returns that has been widely reproduced, it showed stellar results specifically for that type of stock.

The research outfit's "added methodologies to reflect changes in the industry" show that dividend growers have done well, but that a more profitable strategy -- albeit one that comes with greater volatility and turnover -- is to simply focus on dividend yield. The top half of yielders have beaten growers in both bull and bear markets since 1973.

Be careful focusing only on yield, though: A do-it-yourself method that worked until it didn't was the "Dogs of the Dow," popularized in a 1991 book by Michael O'Higgins, "Beating the Dow." It recommended buying the top 10 dividend-yielders in the 30 stock blue-chip index each year.

Consider a twist: During a recent discussion, Bank of America strategist Savita Subramanian was asked by podcast host Meb Faber whether she had some simple screens she recommends for picking stocks.

She said dividing large capitalization, dividend-paying stocks into five buckets by yield is the first step. It isn't the top group that one should buy, though, because those really could be dogs -- sort of like Walgreens before its meltdown. Instead, buy the second-highest group of yielders.

"So it's just like the Steady Eddie strategy that anybody can run...you can get this data off the internet for free. You can run it yourself every month, and it's just been, like, a really kind of an interesting, very, very boring unsexy strategy that seems to work in most market environments," said Subramanian.

How well? Using information from Hartford Funds, a $1,000 investment in the S&P 500 or its predecessor made in 1930 would have grown into $8.6 million through last year. An investment in the second quintile of stocks by yield would have grown to $31 million.

Can you do even better? Maybe. Faber, the podcast host, runs a suite of funds as his day job that focuses on a concept called shareholder yield -- the total excess cash deployed by companies, which also includes buybacks and net debt reduction. At the end of 2023, it compared its Cambria Shareholder Yield ETF to a universe of 188 buyback or dividend funds tracked by Morningstar that had existed since its inception in May 2013. It performed the best.

The edge actually could be understated. Using excess cash for purposes other than dividend payouts is more efficient in a taxable account -- a big reason Berkshire Hathaway hasn't paid a dividend for nearly 60 years.

It will never be an aristocrat, but that seems to have worked out just fine.

Write to Spencer Jakab at Spencer.Jakab@wsj.com

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May 09, 2025 05:30 ET (09:30 GMT)

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