Dividend growth investing isn’t about maximizing current income, nor should it be confused with traditional growth investing. In fact, the Morningstar US Dividend Growth Index currently falls on the value side of the US stock market.
What is a dividend growth strategy? You might hear it pitched as a “quality”-focused investment approach, with “defensive” characteristics. Companies growing their payouts to shareholders are, in theory, financially secure. Their competitive positions are generally strong, even strengthening. By reputation, dividend growth stocks are less volatile than the broad market. These attributes have attracted billions in investor capital to funds with “dividend growth” in their names.
Yet, dividend growth stocks have underperformed the broad US equity market over the past decade. They have not lagged as far behind as the high-yield section of the market, but as a group they’ve failed to keep up. Let’s look at what’s behind their struggles.
Not Everything You Hear About Dividend Growth Stocks Is True
The Morningstar US Dividend Growth Index includes large-, mid-, and small-cap companies with a five-year history of increasing their cash payouts to shareholders. To be in the index, companies must display positive consensus earnings forecasts and must have a payout ratio under 75%. As of July 2025, 397 US companies met the index criteria.
The Morningstar US Dividend Growth Index and other dividend growth strategies score below the broad stock market on measures of corporate “quality” today. Dividend growth stocks currently lag the Morningstar US Market Index in profitability, financial strength, and returns on capital.
How can this be? Comparing the top 10 constituents of the Morningstar US Dividend Growth Index to those of the broad equity market as represented by the Morningstar US Market Index shows how concentrated the “broad” market has become in key technology and tech-adjacent companies—only a few of which are dividend growers.
The dividend growth index excludes phenomenally…
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