Dividend-paying companies are rapidly closing the gap in earnings growth with tech stocks, further driving earnings momentum into the S&P 500 index. This key earnings metric has increased significantly over the past year, a trend that suggests dividend stocks may make an even stronger case for investors looking for income and security in a volatile market.
Earnings momentum is spreading beyond the tech sector as investors look for ways to limit risk in the wake of the second Middle East military conflict in less than a year and an unprecedented oil market shock.
In the first quarter of 2025, the S&P 500 Dividend Aristocrats Index recorded -5.5% earnings growth. By the fourth quarter of last year, its profit growth had returned to positive 9%. At the same time, the Nasdaq 100 Index’s earnings growth rate fell from over 35% in the second quarter of 2025 to less than 15% in the fourth quarter.
Simeon Hyman, global investment strategist at ProShares, said on CNBC’s “ETF Edge” podcast this week that the rotation that began well before the war away from Mag7 tech stocks is worth investors taking a deeper look at during a time of market uncertainty.
“We think one of the best ways to take advantage of this is to take advantage of blue-chip stocks, companies that have increased their dividends for at least 25 consecutive years, and unpopular companies,” he said.
Hyman said the reversal started before the outbreak of war, but high-quality, low-volatility stocks could be “kind of a good thing to have during a conflict.”
“It’s not just the price. [of the stocks] “If you go back four quarters, all of the earnings growth was coming from the tech sector and the Nasdaq 100. Those dividends were up year-over-year, but earnings were down a bit,” he said. But the gap is now narrowing and could soon move in the opposite direction. We are now close to parity,” he said, referring to Bloomberg data cited by ProShares in a recent blog post on the subject.
The ProShares S&P 500 Dividend Aristocrats ETF (NOBL) is one of many exchange-traded funds that provides exposure to large-cap U.S. stocks that pay healthy dividends. Its top three holdings are Chevron, Exxon Mobil, and Target.
Stock chart iconStock chart icon
Performance of the S&P 500 Dividend Aristocrats Index over the past year.
ETF experts agree that the outlook for dividend stocks is improving across the market.
“The growth characteristics of companies in the financial sector, the healthcare sector, the industrial sector are areas where you often see increasing dividends. These companies continue to grow and grow,” Todd Rosenbluth, head of research at VettaFi, told CNBC.
A long history of dividend increases reflects consistent cash flow and disciplined management, but has not matched the rapid profit growth traditionally seen in the technology sector. However, strong operating results and improving margins are helping to boost profits for many dividend payers in other sectors. And as earnings grow, these companies continue to increase their dividends while strengthening their balance sheets. At the same time, expectations for tech stocks remain extremely high after years of strong gains, as tech companies are spending huge sums of money building AI, straining their balance sheets and cash flows. Non-tech dividend companies often trade at more modest valuations, and as earnings growth improves, investors may increasingly see them as offering both stability and expansion.
Of course, nothing is certain for equity investors if a war between the US and Iran, as well as factors such as oil prices remaining above $100 and the prolonged closure of the Strait of Hormuz, push prices up in supply-starved economies and push the global economy into recession. Dividend stocks and the ProShares NOBL ETF have been caught up in recent negative sentiment in the stock market, down 5% in the last month, but still up nearly 8% over the past year.
Hyman said this is “certainly not the time to capitulate, but maybe it’s time to adjust the boundaries” and put more emphasis on quality stories. “We love dividend growth companies,” he said.
He noted that after the last two long-running Gulf Wars, stock prices rose 25 to 30 percent in the six to 12 months after the initial rebound. “History is very clear…the market does recover,” he said.
Hyman said there is also a clear history of outperformance in dividend stocks that has “some durability.” And now these stocks are even more heavily weighted in the market. “In addition to the opportunity for sustained outperformance from dividend growth companies, another very important thing is that the overall fundamentals of the S&P 500 are stable,” Hyman said. “They’re now closing the gap,” he said, as profit growth for mega-cap tech companies slows, adding: “This suggests a bit of a soft landing.”
Beyond the Livestream Sign up for our weekly newsletter for an in-depth look at the trends and numbers shaping the ETF market.
Disclaimer
Never miss the most trusted news moments in business news when you choose CNBC as your preferred source on Google.
Source link
