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The Long View
The Morning Filter: Why 2026 Could Be a Breakout Year for Dividend Stocks
00:26:18
Plus, several undervalued stocks to buy with stable dividends.
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Schwab/Ameritrade Announcer
Trading at Schwab is now powered by Ameritrade. Unlocking the power of thinkorswim. The award winning trading platforms loaded with features that let you dive deeper into the market. Visualize your trades in a new light on thinkorswim desktop with robust charting and analysis tools all while you uncover new opportunities with up to the minute market news and insights. ThinkOrSwim is available on desktop, web and mobile to meet you where you are. It's built by the trading obsessed to help you trade brilliantly. Learn more@schwab.com trading please stay tuned for.
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Podcast Disclaimer Narrator
Important disclosure information at the conclusion of this episode.
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Christine Benz
Hi, it's Christine Benz, co host of the Longview Podcast. Today we're bringing you a bonus episode from another Morningstar podcast that we think you'll enjoy. The Morning Filter Every Monday, morningstar's chief US Market strategist Dave Sicara and Susan Jabinski, investment specialist for Morningstar, talk about what investors should have on their radars for the week ahead. Can't miss Morningstar research and a few stock picks or pants. On the special episode of the show, Dan Lefkovitz, Morningstar columnist and former co host of the Longview, sits down with Susan to discuss everything investors need to know about dividend paying stocks going into the new year. It's a great listen and we hope you like the show.
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Susan Jabinski
Foreign. Hello and welcome to a special post Thanksgiving episode of the Morning Filter Podcast. I'm Susan Jabinski with Morningstar. Today I'm sitting down with Morningstar Index's strategist Dan Lefkovitz to discuss dividend stocks. Dan is a columnist for Morningstar.com and co host of of another Morningstar podcast called the Longview. During our conversation, Dan and I will cover how and why dividend stocks have performed the way they have this year, what the stock buyback boom means for dividend stock investors, how to spot a dividend that's unsafe, and more. We're having this conversation on Wednesday, November 19th. Well Dan, thanks for joining me today on the Morning Filter.
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Dan Lefkovitz
Always good to be with you, Susan.
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Susan Jabinski
Now, I'm usually doing this Monday mornings from my home office with coffee. So I have the coffee even though it's not Monday morning from my home office.
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Dan Lefkovitz
I'll try to keep you awake.
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Susan Jabinski
Thank you very much. I appreciate it. Okay, so Dan, you know dividend investing isn't necessarily your specialty, but you know, it's a topic that you go back to time and time again as a columnist. Why is that?
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Dan Lefkovitz
Yeah, I think bottom line, dividends are really important to investors. By my count, there's over $1 trillion in funds and ETFs that screen for dividends or dividend weighted on a global basis. And over the years, our team at Morningstar Indexes has developed a lot dividend weighted dividend screened indexes, from high yielding equities to dividend growth to combining dividend and buybacks. And I happen to think that dividend investing is just a good way to participate in the equity market, not just for income, but also for total return.
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Susan Jabinski
All right, well, we're going to unpack a large part of that today, so glad you're with us. So let's start out with a little bit of an update for our audience on the performance of dividend stocks. So far in 2025, how have they held up compared to, say, the broad US Stock market?
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Dan Lefkovitz
Yeah, so as of today, most of our dividend indexes have done well in absolute terms, but they've lagged the overall US Equity market not by a massive margin, but by a few percentage points. And the reason is really AI technology. When you invest for dividends, you tend to have less exposure to technology stocks than the broad market. Broad US equity market now is very, very heav weighted to technology stocks, especially AI stocks. You know, just neglecting Nvidia would be a massive detractor to any portfolio on a relative basis. It's past 5 trillion in market cap. So I really blame AI.
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Susan Jabinski
There you go. That sounds fair. So there's also seems to be a bit of a really a split in the performance this year of some of those sectors that we often associate with as being dividend rich. So you have financials and utility stocks doing quite well this year. And then you have, you know, more real estate REITs and energy stocks are struggling. Talk a little bit about those variations in performance.
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Dan Lefkovitz
Yeah, it's a great point. There is a lot of diversity within the dividend paying section in the market. You could add, you know, industrials in there, you could add a health care. But, but just to focus on those sectors that you mentioned, you know, speaking sort of in broad terms, because sector dynamics, you know, you got your sector dynamics, you got industry dynamics, you've got specific dynamics, but utilities, let's start there. That's been an amazing story and it's really a great example of how sectors can change. So you think of utilities as really boring, kind of steady eddy, almost bond like regulated utilities. They've turned into a growth sector. And again, I blame AI. You know, the power demand for AI processing is really really high. And we've seen power demand increase and utility stocks have done really, really well. Outperformed the broad market because of that AI generated demand. Financials is kind of a mixed picture. Actually. The overall sector has done decently. I wrote recently about regional banks having some troubles related to the credit markets. But the big money centered banks like JP Morgan and Bank of America have had a strong year. Credit card companies have done well, insurers have done well. I'd say interest rates that remain kind of elevated have helped some of the banks. An economy that remains fairly robust has helped the overall sector. And deregulation has been a catalyst there as well. Now on the negative side, you mentioned REITs. That's a sector where higher interest rates have kind of weighed on the overall property market. We know the residential housing market is not exactly rip roaring. Office is still kind of weighed on by the hybrid work. Commercial is being weighed on by E Commerce. And then the energy side, we all know that the prices at the pump are lower. The oil price has been weak this year due to oversupply and some weakness on the demand side as well.
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Susan Jabinski
Now let's talk a little bit about dividend stocks globally. You wrote a great column earlier this year talking about how international dividend stocks at that point in time were really sort of outperforming US dividend stocks. So I wanna explore that. Let's first start out with, you know, that was sort of towards the beginning of the year. I think you wrote that in the first quarter. So now that we're in the middle of November, is that still kind of holding where we're seeing international dividend stocks outperforming?
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Dan Lefkovitz
Yes, overall international stocks have outperformed US stocks, you know, full stop. But then you're right, dividend section of the market, you know, has outperformed. Now international dividend stocks have outperformed broad international markets as well, which is a contrast to the US but sorry, just going back to your original question about international versus US and the dividend stocks. You know, Europe has had a really strong year. Emerging markets have had a strong year. Banks especially in Europe, which are rich in dividends, have really performed well this year. And then the depreciation appreciation of the US dollar has really been a factor amplifying returns for all international stocks from the perspective of US investors that are holding unhedged exposure to foreign stocks.
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Susan Jabinski
So that pretty much sums up why they've had a performance advantage this year. Has the advantage been sort of longer than this year?
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Dan Lefkovitz
Yeah, it has. So like I said, international dividend stocks have outperformed the broad international equity market, which is in contrast to the US and technology is just less of a factor. It's a smaller chun of the market overseas. So that's part of it. And financial services are just a bigger part of the market internationally. And it's rich in dividends, and it's performed well.
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Susan Jabinski
Okay, now you say here in the US I'm talking about another column you wrote this year about dividends that we're in the middle of what you're calling a stock buyback boom. And you say that that is something that dividend investors should be aware of and that it might be actually to their detriment. So first define what you mean by a boom here.
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Dan Lefkovitz
Dan Ye. Yeah, it's really been going on for a couple decades, but 2025 is going to be the fifth straight year in which more money is being spent on share repurchases by companies than dividends. About a trillion dollars this year in buybacks and about 750 billion in dividend payments. And it's happening for a lot of reasons. There are tax advantages, of course, to the share repurchase. Dividends are taxed if you're holding them in a taxable account, whereas company repurchases its shares. As long as you don't sell those shares, if you're a holder, you know, your fractional ownership of the company increases. You know, there's an old expression that buybacks are like dating. Dividends are like marriage. And I, I think that that is, that is apartment you know, dividend. The dividend commitment is really considered sacrosanct by many in the US Market, especially if you commit to a quarterly payout to shareholders. The market expects that. And if you withdraw it or you reduce it, the market punish. So buybacks can be more opportunistic when the company has cash on hand or really preferably when the shares are undervalued.
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Susan Jabinski
Right, right. As opposed to when they look expensive and they're buying them back. So the main reason then why is the main reason you think that companies are doing more buybacks than simply because they don't want the commitment or is there some advantage to the company to doing it?
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Dan Lefkovitz
I think the flexibility, I think, I think another part of it is that technology companies just seem to prefer buy buybacks. I think dividends have a little bit of a stigma. It's just the culture of Silicon Valley. And dividends are kind of considered old economy. They're considered something that you do when you don't have something better. To do with the cash, you know, reinvestment, R and D, that sort of thing. So I think there's multiple factors.
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Susan Jabinski
Okay, so then let's talk a little bit about what this buyback boom then means for dividend investors. Those people who do want the, you know, they want the cash in hand, Dan, they don't necessarily want their, you know, share buybacks. What does it mean for them?
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Dan Lefkovitz
Yeah, it's just lower yields. So, you know, if you go back to last century, historically the Yield on the US equity market was between 3 and 6%. Now it's 1.1%. That's, that's come down. That's even low by the standards of the past 25 years. But the dividend yield has just generally been much lower over the past 25 years than it used to be. So it's harder to get equity income from US Stocks than it, than it once was.
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Susan Jabinski
So let's talk, let's go back to international dividend stocks then. You know, you say, you said in your column that, you know, this buyback boom has been largely a US Phenomenon. So why hasn't it been more prevalent internationally?
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Dan Lefkovitz
Dividend. Sorry, buybacks are less popular overseas than they are in the US Part of it is that I mentioned, you know, the dividend, the commitment, like marriage, you know, if you, if you reduce, you eliminate, you suspend your dividend payment, it tends to get punished. In the US that's less the case overseas. Dividends in many markets can be paid out more opportunistically. The tax advantage that I mentioned isn't as big, especially in Europe. So, yeah, we just have seen buybacks kind of take hold overseas the way we they have in the U.S. so.
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Susan Jabinski
You know, you did suggest in your column that, you know, U.S. investors could, of course, you know, look to international markets for, you know, getting some dividend pickup if they're looking for it. But there are, of course, tax implications to be aware of. Right.
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Schwab/Ameritrade Announcer
Yeah.
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Dan Lefkovitz
Just to put some numbers on it, if you look at our index of international stocks, the Morningstar global markets ex US index, the dividend, the yield. Dividend yield exceeds 3%. In the US it's 1.1% again. So there are some really nice yields to be had if you are willing to consider international stocks. But yes, there are tax implications. It is possible to get double taxed on the dividends, depending on the company, depending on the market. So it's important, it's something to look into.
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Susan Jabinski
Sure. Make sure you understand that before you dive in. Okay, so you've established that you know, dividend income is shrinking here in the US which is not good news. So given that it's probably even more important than it's ever been for investors who are focused on dividend stocks, that they really feel confident that those dividend stocks, that those dividends are secure and that they're not buying a dividend stock that might be on the precipice of a dividend cut. Now, you've done some research about things that investors can look for if they're trying to suss out, all right, how likely is this company to actually cut its dividend? Is dividend history one of those things you think investors should be looking at?
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Dan Lefkovitz
I would never say that history is unimportant and that you should ignore it completely. But I think it can be overemphasized and too much stock can be put in it. So, you know, just because a company is, has a 5, 10, 15, 50 year record of paying out a dividend doesn't mean it's going to continue. The past isn't necessarily predictive. We've seen a lot of companies over the years that are considered, you know, dividend champions or dividend aristocrats, however they're marketed, that end up reducing, you know, eliminating their dividends. Just to mention some names, you know, Dow Chemical was one this year that cut its dividend. We've seen WalGregreens, we've seen 3M, we've seen intel cut its dividend. Overseas Shell, they had a history of paying out dividends that went back to World War II when they cut in 2020. So just because a company has a long history doesn't necessarily mean it will sustain its dividend going forward. And just something I'll mention, you mentioned about that dividend durability and how important it is, it's not just about the loss of income. If a company cuts, it's usually a sign of broader trouble and it's usually accompanied by a share price reduction as well.
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Susan Jabinski
So let's talk about some of the more forward looking metrics you think can be useful when you're trying to suss out dividend stability. The first one you talk about in your column is payout ratio. So first define for our viewers, you know, and audience what that is and then explain how it can be an indicator.
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Dan Lefkovitz
Yeah, so simply put, the payout ratio is the percentage of the company's earnings that it pays out in dividends. And you want, there's kind of a happy medium where you want the company to be generous with how much cash it's Returning to shareholders, but not so generous that the dividend you know, ends up being unsustainable.
- [14:49]
Schwab/Ameritrade Announcer
Trading at Schwab is now powered by Ameritrade, unlocking the power of thinkorswim, the award winning trading platform loaded with features that let you dive deeper into the market. Visualize your trades in a new light on thinkorswim desktop with robust charting and analysis tools, all while you uncover new opportunities with up to the minute market news and insights. ThinkOrSwim is available on desktop, web and mobile to meet you where you are. It's built by the trading obsessed to help you trade brilliantly. Learn more@schwab.com trading so what would you.
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Susan Jabinski
Say, is there such a thing, Dan, as like a good payout ratio? Does that vary by industry? How can an investor know whether the number they're seeing is reasonable for that company?
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Dan Lefkovitz
Yeah, so on a couple of our dividend indexes, we screen out any company that has a payout ratio over 75%. So if you're paying over 75% of earnings in dividends, we consider that to be risky and unsustainable. Yes. In theory, a company, a sector, an industry that has more predictable earnings, less volatile earnings, should be able to sustain a higher payout ratio.
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Susan Jabinski
But.
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Dan Lefkovitz
But as we talked about earlier with utilities, investment dynamics are always changing. You used to think of utilities as kind of steady eddies, and now they're growth stocks. And there's other sectors where the opposite has occurred. So to keep it simple, we just apply that 75% threshold across the board.
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Susan Jabinski
That makes sense. So then your second dividend cut, sort of predictor or metric to look to if you're trying to figure out how secure a dividend is, is looking at whether or not the company has an economic moat. So before we talk about the relationship, first remind our audience what an economic moat is.
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Dan Lefkovitz
Yeah. So this is a metaphor that Warren Buffett came up with. You know, just like medieval castles had water that protected them from enemies, a company can have some kind of durable competitive advantage, some kind of structural feature that protects its profits from competition. And profits are important because they fund dividends.
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Susan Jabinski
So now you have done some research with your colleagues looking at this relationship between dividend stability and whether or not a company has. You use Morningstar's economic moat ratings, which are none narrow and wide. What sort of relationship did you see between dividend stability and moat rating?
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Dan Lefkovitz
Yeah, companies with economic moats tend to sustain their dividend payments better than companies without moats. And we should say about the payout Ratio companies with lower payout ratios, or let's just say companies with high payout ratios tend to cut their dividends more frequently.
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Susan Jabinski
Got it.
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Dan Lefkovitz
So both are good predictors.
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Susan Jabinski
Okay, now your final metric is a little bit more difficult for like an individual investor to necessarily get their arms around. But I still want us to talk about it because I still think it's valuable. And that's something that your team uses in constructing some of the indexes called distance to default. So define what that is.
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Dan Lefkovitz
Yeah, it's a quantitative measure. I'm not going to reel off the Greek letter formula for you, Susan, but it's a measure of financial health.
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Susan Jabinski
Health.
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Dan Lefkovitz
And it incorporates balance sheet information, but also it looks at equity value and the equity price volatility, which is important, I think, because the market can sometimes suss out financial distress and deterioration before it shows up in financial statements.
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Susan Jabinski
So then distance to default isn't something that's easily accessible. But we do have indexes that do use that distance to default metric. Is there one in particular that maybe you'd steer investors to look at some of the constituents as if they're looking for, say, a short list of stocks that should have some dividend stability?
- [18:24]
Dan Lefkovitz
Yeah. Dividend Yield Focus is one that screens on both economic moat and distance to default measure. It's interesting. I think we built that one in 2010. So it was in the wake of the financial crisis that kind of peaked in 2008. So it was really kind of a defensive minded methodology that we built to screen companies that would be able to sustain their dividend and remain financially healthy.
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Susan Jabinski
Now, I know you're not in the business of like giving out stock picks. That's Dave Sicara's job and he's not with us here today. But you know, can you share a couple of companies that maybe look reasonably priced that are in that, that particular index that we could maybe say are, you know. Well, these are some pretty stable seeming dividend stocks that are trading at attractive price multiples.
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Dan Lefkovitz
Yeah. So some companies in the Dividend Yield Focus index that are attractively valued right now across economic sector, Merck, Pepsi, Kenvu, Alliant Energy.
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Susan Jabinski
Okay, that sounds great. And again, for anyone who wants more information about any of those, they can go to morningstar.com to do their research. Okay, so let's pivot over to a related topic, and that's dividend growth investing. You touched on that sort of at the beginning of our conversation. Seems it's like sort of a betwixt between. Because it's not, you're not really, if you're a dividend growth investor, you're not really looking for the highest dividends. But this isn't pure really the highest growth. These aren't the highest growth stocks you're looking for either. So talk a little bit about what dividend growth investing is and why it could be an attractive strategy to pursue for an investor.
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Dan Lefkovitz
Yeah, yeah. So dividend growth, you know, is about targeting companies that are increasing their payouts to shareholders. If you think about it, you know, companies that are upping their dividends are strong and strengthening, so they've got maybe improving prospects. It's a way to kind of zero in on high quality companies, companies with you strong competitive positioning, maybe even economic moats. And it's a strategy that is known to have a defensive orientation. So less volatile than the broad equity market.
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Susan Jabinski
So I think you said at the top of the Show, Dan, that U.S. dividend stocks have as a group lagged this year. So is that true of dividend growth stocks have also lagged the broader US Market?
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Dan Lefkovitz
It is. They've performed decently in absolute terms. But a few percentage points, if you look at the Morningstar US Dividend Growth Index, it's a few percentage points behind the broad U.S. equity market.
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Susan Jabinski
And we blame AI for that.
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Dan Lefkovitz
Absolutely. Less volatile. Less volatile now.
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Susan Jabinski
Well, and that's what I was going to ask next. So, you know, have we seen dividend growth stocks and maybe they've, you know, haven't quite kept up this year, but have they? Because we have seen some volatility, especially recently as you and I are sitting here with some, with that AI trade. Have we seen a little bit more stability with dividend growth stocks?
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Dan Lefkovitz
Yes. When we, we've seen during sell offs this year, not just this year, but, you know, if you go back to 2022, 2018, those were, you know, for the broad stock market and dividend growth has held up better entering those sell offs.
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Susan Jabinski
Now you talked in your column about dividends growth stocks earlier this year that you're seeing an evolution, a bit of an evolution in that dividend growth stock universe. Tell us about that.
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Dan Lefkovitz
Yeah, we're definitely seeing more technology stocks come into the dividend growth universe. You know, I, I mentioned earlier that the culture of Silicon Valley, you know, is not so warm on dividends, but that's kind of of a gross oversimplification. You know, Apple pays a dividend and they're in the dividend growth index. Microsoft is a technology stock that pays a dividend in there as well. Applied Materials is another company, I should also mention Broadcom, semiconductor maker that's in several actually of our dividend indexes, not just dividend growth. So it's not, you know, not necessarily the case that you get no technology exposure. Oracle is another one that is, you know, paying a dividend.
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Susan Jabinski
But a lot of those tech companies aren't sort of your big dividend payers. They're going to be more the dividend growth stocks really.
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Dan Lefkovitz
That's right. That's right. And the yields, you know, in many cases are really low. Okay, yeah.
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Susan Jabinski
So then what do these changes to the sort of this dividend growth landscape mean for dividend stock investors in terms of, you know, maybe what they should be expecting. Let's say they own a managed product of dividend growth, either an index ETF or an actively managed dividend growth. You know, should they have different expectations moving forward for performance or, you know.
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Dan Lefkovitz
I, I like to say dividend growth tends to, to perform in between the market and the high dividends paying section of the market. So when high dividend paying stocks are outperforming, dividend growth is, tends to lag but perform better than the market. And then the inverse is also true when the market's doing really well. Dividend growth tends to be behind the market, but not as far behind as high yielding equities. And I expect that general performance pattern to continue.
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Susan Jabinski
Okay, all right.
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Dan Lefkovitz
It's more market like.
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Susan Jabinski
Okay, okay. All right. So now last question, and I saved the biggest for the last. Dan, I know you're not a market strategist, I know you don't have a crystal ball, but I'm going to ask you anyway. Considering what we saw with dividend stocks this year, where valuations are in the market, where we are with interest rates, where we are at the economy, where we are with tariffs, buybacks, all of valuations. What would you say are some things our audience, if they are buying dividend stocks, should be keeping in mind for 2026?
- [23:55]
Dan Lefkovitz
Well, if I look at what our research and investment teams are thinking about going forward, they think the US equity market is looking a bit frothy overall. They especially think that the technology sector, that AI related stocks, many of those valuations look pretty rich. They think valuations are a lot more reasonable on the value side of the market, which is where a lot of dividend paying stocks tend to be small caps is another area which they think is attractive as well. So I wouldn't be surprised if there was further volatility and maybe a sell off or a rotation. I wouldn't be surprised to see dividend payers perform well. That's definitely what we saw again in 2022 when the market was down, big technology stocks were really selling off very dramat and the dividend paying section of the market held up really well longer term. I just think dividend investing, whether it's dividend growth or high yield, is just a good way to participate in the equity market, especially if you are obviously if you're looking for income, but even if you're just kind of looking for more of kind of a defensive approach.
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Susan Jabinski
Well, Dan, I'll hold you to that when I talk to you next year around this time. Thank you for your time. Happy holidays.
- [25:10]
Dan Lefkovitz
Thanks Susan. Happy holidays you thank to you that's.
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Susan Jabinski
It for this week's episode of the Morning Filter. I hope you'll join my colleague Dave Sicara and I next Monday at 9am Eastern, 8am Central for a new episode. Dave and I will be previewing the Fed meeting and unpacking his updated stock market outlook. You won't want to miss it. In the meantime, please like this video and subscribe. Have a great week.
- [25:32]
Christine Benz
Hi, it's Christine again. That was the Morning Filter podcast. If you enjoyed the show as much as we did, please subscribe on Apple Podcasts or wherever you get your podcast. We'll be back soon for the latest episode of the Longview. Thanks for listening.
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Podcast Disclaimer Narrator
This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording and are subject to change without notice. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. And its affiliates, which together we refer to as Morningstar. Morningstar is is not affiliated with guests or their business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy or the completeness of the data presented herein. This recording is for informational purposes only and the information, data analysis or opinion it includes or their use should not be considered investment or tax advice and therefore is not an offer to buy or sell a security. Morningstar shall not be responsible for any trading decision, decisions, damages or other losses resulting from or related to the information, data analyses or opinions or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile. Before making any investment decision decision, please consult a tax and or financial professional for advice specific to your individual circumstances.