By Ian Salisbury

Inflation is slowing in the U.S., but so is growth. That means investors might want to focus on companies that are paying -- and growing -- their dividends.

The U.S. economy's worst bout of inflation in a generation appears to be under control. But growth remains a worry for investors. On Thursday, the Bureau of Economic Analysis reported first-quarter gross domestic product shrank at an annual rate of 0.2% -- not quite as bad as the initial 0.3% read, but still negative.

The combination of economic forces -- slow growth and neutral inflation -- favors stocks of companies that pay, and especially ones that raise, their dividends, according to a report Thursday by Ned Davis Research analysts Ed Clissold and Thanh Nguyen.

Ned Davis examined S&P 500 stock returns during nine different economic regimes going back to 1973. Weak growth and neutral inflation occurred relatively rarely, only about 6% of the time, compared with more common climates like rising growth, or stable growth with neutral inflation.

During slow-growth, inflation-neutral periods, however, dividend growers posted average annual returns of 6.2%, while all dividend payers returned 4.4%. By contrast, companies that paid dividends but didn't raise them posted annualized losses of 1.7% and nonpayers posted average losses of more than 10%.

While NDR doesn't delve into the reasons, they aren't hard to fathom. Companies that regularly make and raise dividends tend to be blue chips, with established business models and solid cash flows -- the same kinds of companies that hold up well in an iffy economy.

Fortunately, the S&P 500's dividend stream has been pretty healthy, all things considered. For the past 12 months ended in April, S&P 500 companies paid out $76.54 a share, up from $71.03, in the previous year, according to S&P Global.

"Dividend growth has continued, but is noticeably slower than had been hoped for, though is in line with expectations given the economic uncertainties," wrote S&P Global analyst Howard Silverblatt in a note earlier this month. "At this point, the uncertainty does not appear to have stopped increases, but it did appear to limit the size of them, as forward commitment levels appeared shy."

Among the sectors whose payout make up the biggest share of the S&P 500's overall dividend stream: Financials stocks, whose payouts amount to 15.8% of the total; followed by technology at 15.4%; healthcare at 14.2%; and consumer staples at 10.8%.

Of course, investors who don't want to buy individual stocks can find plenty of mutual funds and exchange-traded funds that target dividend stocks, like Capital Group Dividend Growers ETF and Vanguard Dividend Appreciation ETF, among many others.

Ned Davis did offer one caveat to its market analysis. If the economy avoids a recession, the rate of GDP growth could pick up, while inflation remains steady, the firm notes. That could diminish dividend growers' advantage -- although not completely eliminate it.

"Such a regime would still favor payers over nonpayers and growers over cutters but by smaller spreads," wrote Clissold and Nguyen.

Write to Ian Salisbury at ian.salisbury@barrons.com

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May 30, 2025 02:00 ET (06:00 GMT)

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