The Market Is Pricey. Dividends Can Provide a Cushion in a Pullback.
Sep 05, 2025 00:01:00 -0400 by Jack Hough | #Dividends #Streetwise
Marriott could grow its dividend payments at a low-double-digit pace. (Angus Mordant/Bloomberg)
The U.S. stock market appears to be on dividend Ozempic. Late last year, the percentage of earnings paid out to shareholders hit a 25-year low. J.P. Morgan predicted a big reversal, saying that payment growth would average 7.6% over five years, two points more than the prior 20 years. Instead, the slimdown continues. S&P 500 dividends are now projected to increase by just 4% this year, well below the 11% growth for earnings. The index’s yield is barely 1%.
Before I come to some companies that are bucking the trend, it’s fair to ask: Who cares? Investors have made great money on things that pay nothing, like gold , Bitcoin , and Nvidia. Technically, each $170 share of that last one pays a penny per quarter, but still. JPM points out that reinvested dividends made up 55% of returns from 1987 through the middle of last year. But over the past decade, dividend stock indexes have largely underperformed.
That has left dividend stocks relatively cheap and unloved—a bit like overseas stocks at the start of this year, after decades of lagging behind America. Suddenly, while the U.S. has returned a hefty 16% this year, an investment in all other countries has made twice as much in dollar terms.
Dividend stocks look similarly due. A basket of them, the iShares Core Dividend exchange-traded fund, trades at 15 times earnings. That’s close to the broader market’s historical average, but right now, the S&P 500 trades at a lofty 24 times earnings.
Jim Reid, head of thematic research at Deutsche Bank, writes that the U.S. market’s valuation today compares with three peaks over the past century, each of which was followed by a decade of negative returns, after subtracting inflation.
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The bull case seems to hinge on artificial intelligence powering a “paradigm shift” unlike anything seen in the past 150 years, he writes. If AI falls short, diversification can help. Overseas stocks remain reasonably priced. Safe, short-term bonds pay around 4.25%. And dividend payments can provide comfort amid a dip in prices.
For investors who want to add dividend exposure, the aforementioned iShares fund tracks a passive index and pays 2.9%. Top holdings include Cisco Systems , yielding 2.4%; Exxon Mobil, 3.5%; JPMorgan Chase, 1.9%; Qualcomm, 2.3%; and Wells Fargo, 2.2%.
For higher starting yields but slower payment growth, there’s a sibling fund. The iShares Core High Dividend ETF pays 3.4% and also counts Exxon as a top holding, along with Johnson & Johnson, yielding 2.9%; AbbVie, 3.1%; Chevron, 4.3%; and Home Depot, 2.3%.
Moving in the other direction—lower starting yields but zippy payment growth—raises challenges. The iShares Core Dividend Growth ETF, yielding 2.2%, counts J&J and JPM as top-five holdings. But the others are Big Tech names whose yields stink: Apple, 0.4%; Microsoft, 0.6%; and Broadcom, 0.8%. That might not be ideal for offsetting S&P 500 exposure.
Better perhaps to turn to a stock-picker for names with humble yields now but potential for quick payment increases. I spoke with Matt Quinlan, who manages a pair of dividend strategies for Franklin Templeton, including a growth-focused one just launched in ETF form, ticker FRIZ. Quinlan likes Apollo Global Management, which pays 1.5% and has a lead in private credit, with well-received fund launches and steady funding. Fee-related earnings should grow by around 20% annually, with dividend payments rising in tandem, Quinlan reckons.
Marriott International yields only 1% but is likely to grow dividend payments at a low-double-digit pace, says Quinlan. It will get there through 5% room growth, plus a few points for price increases, and some margin improvement. Strong demand from Asia bodes well, as does a popular loyalty program and plenty of business travel.
Industrial equipment maker Parker Hannifin is another 1% payer with potential for low-double-digit payment growth. Quinlan likes the company’s proven financial record—it has more than doubled the S&P 500’s return over the past decade—and exposure to attractive end markets, like aerospace, digitalization, and electrification.
Yes, these starting yields are unexciting. For somewhat higher ones with more moderate payment growth, Quinlan likes Cisco; RTX, formerly Raytheon, paying 1.7%; and Philip Morris International, which is growing quickly in smokeless products and yields 3.3%.
Shifting gears, Lyft has two things going for it, stock-wise. It is relatively cheap, at 1.0 times revenue versus 3.7 times for rival Uber Technologies. And Lyft’s free cash flow has turned solidly positive, equaling perhaps 13% of the company’s market value this year.
The rising profitability is thanks to CEO David Risher, who took over for the company’s founders in 2023. Since that announcement, Lyft shares have returned 76% versus 68% for the S&P 500—but Uber has returned 202%. That brings us to the biggest knock on Lyft: that Uber is much larger, yet still growing faster.
I asked Risher about that. He points out that Lyft is growing about as quickly as Uber domestically, which is its key market. A July acquisition of Europe’s Freenow will give Lyft a boost overseas. Other growth initiatives include Lyft Silver, a service tailored for seniors.
The simplest path to expansion is simply convincing more Uber riders to check Lyft before booking. As for the competition, Risher says there are 160 billion car rides a year in the U.S., and that Uber and Lyft combine for only around 2.5 billion.
“People have a mind-set, and I just think it’s wrong…a winner-take-all mind-set,” says Risher. “I think this marketplace works super well with two players.”
Write to Jack Hough at jack.hough@barrons.com. Follow him on X and subscribe to his Barron’s Streetwise podcast.