CONTRIBUTORS
Michael Clarfeld, CFA
Portfolio Manager
ClearBridge Investments
Key takeaways
- While equities have seen elevated bouts of volatility in 2025, broadening market participation and the persistence of long-term US economic strength suggest the US markets still offer fertile ground for potential investment opportunities.
- We believe the long-term economic outlook for the United States is positive given attractive demographics, a healthy labor market, leadership in innovation across many sectors, access to capital, and energy security—structural strengths likely to persist through economic and political cycles.
- Dividend growers possess three attributes for an environment marked by inflation and policy risk: potential for downside protection, current income and, importantly, growth.
Broadening market welcomes dividend growers
While equities have seen elevated bouts of volatility in 2025, broadening market participation and the persistence of long-term US economic strength suggest fertile ground for opportunity in US markets. In this environment, where inflation concerns and elevated policy uncertainty increase the attractiveness of income growth and more conservative risk allocations, we believe the timeless attributes of dividend growers make them excellent candidates for investors to consider.
Historically, when the top 10 weights in the S&P 500 Index have accounted for more than 24% of the benchmark, the equal-weight S&P 500 has outperformed its cap-weighted counterpart by an average of 6.4% annualized over the next five years. Top weights in the S&P 500 currently make up 35% of the index.
Exhibit 1: Concentration Leads to Broadening
Source: FactSet. As of March 31, 2025. Data shown is from December 1989 to March 2025. Monthly constituent level market cap data. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
A broadening market would coincide with what looks like the end of a period of large underperformance for dividend growers relative to the S&P 500. Following similar periods such as the late 1990s and early 2000s, dividend growers went on to outperform the S&P 500 in subsequent years.
Exhibit 2: Dividend Growers Gaining
Sources: S&P, NBER, Bloomberg. As of March 31, 2025. Dividend Growers are S&P 500 stocks with three consecutive trailing years of positive dividend growth (inclusive of special dividends) on a rolling basis (quarterly), evaluated monthly, equal weighted. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
The backdrop of the US economy, meanwhile, looks much stronger to us than headlines might imply. The United States enjoys structural strengths that are not easy to undermine. While the market may continue to experience volatility, we believe the long-term outlook for the US economy is positive given attractive demographics, a healthy labor market, leadership in innovation across many sectors, access to capital, and energy security. These structural strengths are likely to persist through economic and political cycles.
Looking a little deeper, while the long-term attractiveness of the US market is intact, the current environment is marked by crosswinds that require a near-term playbook. Inflation from tariffs—although the most severe scenario seems to have been avoided for now, even a 10% increase is meaningful—remains a concern. While off recent peaks, long-term interest rates are elevated, in part reflecting the inflation picture. Related policy uncertainty adds a level of volatility that argues for conservative positioning.
Dividend growers possess three attributes for environments like this: the potential for downside protection, current income and, importantly, growth.
- Downside protection: With the market more or less back to where it began the year (which finished a two-year period in which it soared nearly 60%) and again near all-time highs, there is some valuation risk. In our view, dividends remain undervalued versus their high-growth peers and have historically outperformed during turbulent periods as many investors gravitate toward stocks that have offered payouts. This was evident during the first quarter of 2025 and early April as dividend growers protected strongly on the downside.
- Current income: In big bull markets investors tend to overlook dividends. When a handful of mega-cap growth stocks drive the preponderance of equity market performance, people predictably focus on capital appreciation. But bear markets also remind us that dividends—albeit prosaic—are responsible for 40% of total return over the long term. In flat-to-down markets, meanwhile, dividends have the potential to provide a cash flow return to investors that offsets share price stagnation or depreciation.
- Growth: While strong upfront yield is attractive, the real power of equity is in its long-term compounding and growth potential. Unlike bonds, which typically offer fixed coupons, dividend-paying equities have the potential to offer rising cash flow streams over time.
Dividend growth is great in regular periods, but we believe it is absolutely critical during inflationary periods. As inflation erodes the value of a dollar, growing dividends help to maintain purchasing power despite the increasing cost of living. With fears of tariff-induced inflation still a concern, inflation protection could become more important, supporting the case for dividend growers.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
Equity securities are subject to price fluctuation and possible loss of principal. Large-capitalization companies may fall out of favor with investors based on market and economic conditions. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
US Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the US government. The US government guarantees the principal and interest payments on US Treasuries when the securities are held to maturity. Unlike US Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the US government. Even when the US government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.
Dividends may fluctuate and are not guaranteed, and a company may reduce or eliminate its dividend at any time.
WF: 5520210