With technology stocks still dominating the market conversation and the 10-year Treasury yield hanging around the 4.5% level, investors now have a more complicated income decision to make. While cash and bonds still offer attractive yields, they do not provide the same potential for long-term growth or dividend growth that quality equities can offer.
Time for a fresh look at dividend-focused investing, advisors say.
While dividend stock yields today are typically below what can be earned in treasuries, investing in dividend-paying stocks can offer investors the opportunity to both earn income while also participating in growth and capital appreciation opportunities companies are pursuing.
Matt Quinlan, portfolio manager of the Franklin Equity Income strategy, for example, likes situations where a company is generating free cash flow at a sufficient rate which allows them to pay a growing dividend while also enabling reinvestment back into the business to improve its competitive positioning for the future. According to Quinlan, effectively balancing those capital allocation decisions can enable investors to earn an increasing income-stream over time and participate in a potentially rising stock price.
“With the S&P 500 near all-time highs, dividend yields are often low, but over time, dividends can contribute materially to an investor’s total return in an investment,” Quinlan said.
As for clients that are concerned about market concentration, particularly among the technology sector, Quinlan says they can create a diversified portfolio of dividend-paying stocks which can offer attractive income and total return potential over time. While the technology sector has performed very well in recent years and captured much investor attention, he believes some sectors outside of technology have also performed well and many of those contain dividend paying stocks worth owning.
“Numerous companies within such sectors as financials, industrials and utilities have seen strong gains and many of those companies also pay dividends. We believe that factors contributing to this ‘market broadening’ theme should continue through 2026 as we see many different types of companies benefitting from positive developments across the economy,” Quinlan said.
Elsewhere, Michael Clarfeld, portfolio manager at ClearBridge Investments, is a firm believer that advisors should consider dividend-paying stocks as part of the income conversation because of the dividend growth they can provide. He points out that equities grow their earnings over time, whereas bond payouts are fixed. And with inflation a more pressing concern these days, he says “the ability to grow income” is important.
“Beyond the headline or current yield, investors should look for dividend growth, as well as total return potential and risk. The current dividend yield is just one component of the return from a dividend-payer. The ability to grow that dividend over time and the level of risk attached to both the dividend and total return also need to be considered,” Clarfeld said.
Along similar lines, Jim Gauthier, partner at Cerity Partners, notes that equities offer an inflation hedge as well as a current income stream. In addition, he points out that bonds typically decline in value during times of inflation and rising interest rates.
“Certainly bonds should be a component of a balanced portfolio, but they should not be the exclusive focus for income investors,” Gauthier said.
Advisors should also educate clients on the idea of total return to achieve their financial goals, according to Gauthier.
“The ability to craft a portfolio that is diversified and will provide the returns conducive to the client’s needs,” Gauthier said.
Lauris Lambergs, vice chair of professional development for the Investments & Wealth Institute & Chief Investment Officer of Renaissance Wealth Advisors, agrees, saying it is critical to always keep the total return picture in mind and this is where dividend-producing equities can really make a compelling long-term case.
That said, Lambergs warns advisors to be mindful of a “yield trap” where the yield ratio increases due to falling share price and not to an increasing dividend.
“Ideally, the ratio of the dividend to earnings, or free cash flow, is sustainable, allowing both for sufficient reinvestment into the company with a nice return to the shareholder,” Lambergs said.
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