Skip to Content
US Videos

Dividend Stock Deep Dive: Dividend-Growth Stocks

What companies are well positioned today?

Companies that have consistently grown their dividends over time are generally financially healthy and can therefore withstand economic uncertainty better than lower-quality companies. In this episode of Dividend Stock Deep Dive, guest Dan Lefkovitz discusses dividend-growth stocks.

Key Takeaways

  • The types of companies that typically offer dividend growth.
  • Why dividend-growth stocks may be good choices during inflationary times.
  • Whether dividend-growth stocks are less risky than the general market.
  • Which dividend-growth stocks are undervalued today.

David Harrell: I'm David Harrell, editor of Morningstar DividendInvestor newsletter, and I'm here today with Dan Lefkovitz, who is a strategist with Morningstar's indexes group.

Dan, thanks for being here.

Dan Lefkovitz: Thanks so much for having me, David.

Harrell: Can you tell me a little about your role with the indexes team?

Dan Lefkovitz: Sure. So, I produce research that's focused on Morningstar's proprietary range of indexes across asset classes—stocks, bonds, multi-asset—and investment types, so traditional market exposure indexes, strategic beta, styles, dividends, ESG, et cetera.

Harrell: Now, you recently released a research report on the appeal of dividend growth investing, especially in today's market where we have high inflation, rising interest rates, and an incredible amount of day-to-day volatility, at least within the U.S. equity market. Now, in your report, you made a number of comparisons using three of the Morningstar indexes. I believe it was U.S. Dividend Growth, the U.S. Market Index, and the U.S. High Dividend Yield Index. Can you tell me a little bit about those three indexes, their construction, and maybe the types of companies we find in each of them?

Dan Lefkovitz: Sure. The Morningstar US Dividend Growth Index includes companies that have grown their payouts to shareholders for five consecutive years, with some screens for dividend durability. It's currently at about 420 stocks, and it weights by available dividends. The Morningstar US Market Index is our broad gauge of the equity market across large-, mid-, and small-cap stocks. It's currently at about 1,600 companies, and it is market-capitalization-weighted. And then, the High Dividend Index is the higher-yielding half of the U.S. equity market, and it is also market-capitalization-weighted. It's currently at about 440 stocks.

Harrell: And so, there's clearly some overlap among those three indexes. Stocks could appear literally in all three.

Dan Lefkovitz: Absolutely.

Dividend-Growth Stocks and Inflation

Harrell Got it. So, within your report, one thing you were noting was the types of firms in the Dividend Growth Index. The companies that, as you say, were able to increase their dividends on an annual basis for at least five consecutive years tend to be well positioned. And you also noted that, of the three indexes, the Dividend Growth Index was the one with the highest percentage of constituents that had a wide economic moat rating from Morningstar analysts, correct?

Lefkovitz: Yeah, that's right. If you look at companies that are consistently growing their shareholder payouts, they tend to be really well positioned. They tend to have competitive advantages, or economic moats in Morningstar equity research parlance. And that's relevant to inflation because companies that have moats around their businesses are better able to pass along price increases than a no-moat business.

Harrell They have pricing power, which is a good thing to have in today's environment?

Lefkovitz: Exactly.

Harrell Got it. So, Dan, when you plotted the overall investment style of these three indexes, you found that the High Yield was the furthest to the left on the style box in the value column. The Dividend Growth was a little to the right of that, and then the overall U.S. Market was closest to the growth side of the spectrum, correct?

Dan Lefkovitz: That's right. If you look at the kinds of companies that have high dividend yields, they tend to be in value sectors like industrials, financials, energy, basic materials. Those kinds of companies are paying out a very high portion of their earnings in the form of dividends. Dividend Growth has a value tilt as well, but it's much closer to the core section of the style box than that high-yield segment of the market. Apple and Microsoft are both in our Dividend Growth Index. You tend to see more technology companies than the High Yield segment. But if you look at the U.S. equity market overall, the extent to which technology and technology-oriented stocks have dominated for so many years, the overall market is quite growth-leaning at this point. And if you look at some of the biggest names in the U.S. Market, mega-caps like Amazon and Alphabet, Tesla, Meta, these stocks don't pay dividends at all.

Are Dividend-Growth Stocks Less Risky?

Harrell What did you see when you looked at the volatility of those returns as measured by standard deviation?

Dan Lefkovitz: Our Dividend Growth index has been less volatile than both the overall Market as well as the High Yield segment. So, it hasn't risen as high during good times. It hasn't fallen as far during bad times. That's consistent with what you'd expect for this high-quality orientation.

Harrell So, less current income than a high-yield strategy, but a little more consistent performance?

Dan Lefkovitz: That's right. A lot of investors use dividend growth strategies as a core defensive way of participating in the equity market. Less about income, more about long-term total return.

Dividend-Growth Stock Picks 

Harrell Got it. In your report, you were also looking at—I think you said you'd used Dividend Growth as sort of a lens for different sectors or different industries, and you were noting some that were on the rise or some that were less well positioned. I was wondering if you could highlight some of those and then maybe for some of those that are better positioned today, maybe give us some names of individual stocks in there, particularly ones that are trading at discounts to their current fair value.

Dan Lefkovitz: I think Dividend Growth is a really interesting lens into where in the market you see improving and declining fortunes. Some of the areas where our Dividend Growth index is overweight relative to the market as well as to the High Yield section are financials, diversified banks, as well as regional banks. So, I'd cite names like Citigroup and Truist Financial. Within the healthcare space, you've got pharma companies like Merck, medical-device companies like Medtronic. Within industrials, aerospace and defense, a name like Raytheon, I'd mention, Emerson Electric and Cummins. And then, semiconductors used to be a cyclical area and I think is becoming more of a secular growth story—some names like Skyworks and Lam Research and Texas Instruments.

Harrell: Great. Dan, thanks for sharing your insights. Great having you here.

Dan Lefkovitz: Thanks, David.

Watch prior episodes:
Dividend-Stock Deep Dive: REITs
Dividend-Stock Deep Dive: Utilities
Dividend-Stock Deep Dive: Energy Ideas

Disclosure: Morningstar, Inc. licenses indexes to financial institutions as the tracking indexes for investable products, such as exchange-traded funds, sponsored by the financial institution. The license fee for such use is paid by the sponsoring financial institution based mainly on the total assets of the investable product. Please click here for a list of investable products that track or have tracked a Morningstar index. Neither Morningstar, Inc. nor its investment management division markets, sells, or makes any representations regarding the advisability of investing in any investable product that tracks a Morningstar index.