The surprising truth about dividend growth stocks

Core Insights - Dividend growth investing is not aimed at maximizing current income and is distinct from traditional growth investing, with the Morningstar US Dividend Growth Index currently positioned on the value side of the US stock market [1] Group 1: Dividend Growth Strategy - A dividend growth strategy is characterized as a quality-focused investment approach with defensive traits, where companies increasing payouts are generally seen as financially secure [2] - Dividend growth stocks are perceived to be less volatile than the broader market, attracting significant investor capital into related funds [2] Group 2: Performance Analysis - Over the past decade, dividend growth stocks have underperformed the broader US equity market, although not as severely as high-yield stocks [3] - The Morningstar US Dividend Growth Index includes companies with a five-year history of increasing cash payouts, requiring positive earnings forecasts and a payout ratio under 75%, with 397 US companies meeting these criteria as of July 2025 [3] Group 3: Quality Metrics - Currently, dividend growth stocks score lower than the broad stock market on measures of corporate quality, including profitability, financial strength, and returns on capital [4] - The concentration of the broad market in key technology companies, which are often not dividend growers, contributes to the underperformance of dividend growth stocks [5] Group 4: Market Composition - The dividend growth index excludes highly profitable companies like Nvidia, Amazon, Alphabet, and Meta, which impacts the quality gap and underperformance of the index [6] - The underperformance is primarily attributed to the index's lower exposure to technology stocks and the exclusion of Alphabet and Meta [6] Group 5: Market Changes - The initiation of quarterly payouts by Meta and Alphabet in 2024 indicates a maturation phase for these companies, with only Amazon, Berkshire Hathaway, and Tesla among the largest stocks not paying dividends [7]