INSIGHTS

On October 13, 2025

AAM Viewpoints — A Broadening of Dividend-Paying Opportunities

Equity markets advanced in the third quarter supported by resilient U.S. economic growth and continued enthusiasm around technology and Artificial Intelligence (AI)-driven themes. The S&P 500 reached new highs as large-cap Information Technology and Communication Services sectors led performance. While tariffs were the point of focus for investors during the first two quarters, attention shifted to the Federal Reserve’s (Fed) policy path. Ultimately, this positioning led to volatile bond yields, with the 10-year Treasury fluctuating between 4.0% and 4.5%, reflecting persistent uncertainty around inflation.

Underscoring a healthy broadening of performance, gains were uneven across sectors. As far as 2025 is concerned, this market dynamic of performance breadth appears to be a tailwind for stock selection and active management. As shown below in Table 1, the Information Technology and Communication Services sectors delivered the strongest returns, while Consumer Staples was the only sector to post negative returns. Interest rate-sensitive sectors were mixed, even with the Fed’s decision to cut its benchmark rate. Financials and Real Estate underperformed the broader market, while Utilities kept a closer pace due to the broad market, as investor excitement built around future AI energy demands.

Table 1

S&P 500 3Q25 Sector Performance

Source: FactSet. Past performance does not guarantee future results.

When it comes to the overall dividend landscape, 2025 has shown that discernment and positioning are incredibly important. We believe that dividend growth does not occur in a vacuum and reflects a well-run company with strong demand for its product/service. So far this year, bottom-up active management, focused on companies rewarding their shareholders via dividend growth, has led to some unique opportunities that have outperformed the broader market. However, historically, investors viewed the dividend category as a homogenous class of equities where little mattered between company A and company B. Instead, investors focused on simple rules such as “better than market” dividend yield, and other company-specific attributes were often ignored or downplayed. Along those lines, investment products with simple quantitative rules focused on maintaining an absolute dividend yield or considered companies that met a “length of dividend payment history” criterion crowded the investing landscape. Ultimately, markets are efficient, and a one-size-fits-all rules-based approach may work at times, but not necessarily in all markets. These rules-based approaches to dividend payers have generally struggled in 2025. What changed?

Dividend yield and beta (risk) tend to be the easiest factors to quantitatively screen out from the broader S&P 500 constituent list. Portfolios focused on these attributes also tend to overly rely on three sectors that have higher-than-market yield and lower beta, as shown in Table 2. However, these portfolios usually overweight Utilities, Consumer Staples, and Healthcare while also underweighting growthier sectors such as Communication Services and Information Technology.

Table 2

Source: S&P Dow Jones Indices. Past performance does not guarantee future results.

2025 has shown that each company and sector’s growth outlook has mattered even more. Utilities have performed admirably this year, given investors’ recognition of the expected growth of future electricity demand. According to Morgan Stanley, the capex spending on Artificial Intelligence within the United States is estimated to be $2.9 trillion between 2025 and 2028¹. The companies pursuing this buildout are frequently called “hyperscalers” and found in the Communication Services and Information Technology sectors. Given the amount of capex investment from the hyperscalers, the missing link has been the massive undertaking required to power these energy-hungry technologies. It is anticipated that by 2050, investment in expanding nuclear power capacity could reach upward of $350 billion². For this reason, the Utilities sector, specifically companies with existing nuclear fleets, have generally been the most rewarded.

Contrasting the strong future demand found in the Utilities sector, a host of issues have plagued the historically reliable Consumer Staples sector. This sector has stumbled due to knock-on effects from supply chain inflationary pressures. While each company in this sector has its own unique set of circumstances, in general, commodity costs have risen, consumer habits are changing, and competition has increased. Similarly, the historically impervious Health Care sector has also struggled as the sector faces looming regulatory changes, which have clouded future growth prospects. So, with all this in mind, do we think an investor should avoid these sectors? On the contrary, we would argue that a properly allocated portfolio should have exposure across every sector — noting that company-specific selection is especially important. Taken further, attributes outside of dividend yield matter as well.

The field of opportunities goes beyond yield

As seen below in Table 3, the highlighted cells are the best performing category for both beta (risk) and dividend yield. In the first quarter, defensive positioning (lower beta/higher dividend yield) did well. In the second quarter, offensive positioning (higher beta/lower dividend yield) did well, and the momentum continued into the third quarter. Because of the performance pendulum swing from defense to offense this year, performance has varied widely within the dividend landscape.

Table 3

Source: FactSet. Past performance does not guarantee future results.

For example, the S&P 500 Dividend Aristocrats Index focuses on companies that have at least 25 years of consecutive dividend increases. Only 69 companies from the S&P 500 qualify for this designation³. Using this index as a proxy for mature and higher-yielding dividend payers, an investor would be up 5.5% year to date vs. the broader S&P 500’s 14.8%, as shown in Table 4. More importantly, the investor would have lost 1.1% over the last one year vs. the broader S&P 500’s appreciation of 17.6%. What was the culprit for this dramatic underperformance? Given the Dividend Aristocrats’ requirement of increased dividends for the last 25 years, only mature sectors and companies tend to meet that hurdle. In fact, at the end of 3Q, the slower-growing Consumer Staples sector equaled 22% of the index. The fast-growing Information Technology and Communication Services sectors had weightings of 2.9% and 0%, respectively.

Table 4

Source: S&P Dow Jones Indices. Past performance does not guarantee future results.

To counteract these shifting sector dynamics, investors could have potentially addressed this incredible underperformance by taking a wider view. For example, a more flexible approach that does not restrict the universe of companies by dividend history length. In addition, by assuring exposure to all sectors, an investor could consider a wider range of companies with varying dividend yields, beta, and dividend growth rates. These subtle changes toward inclusion were the difference between the two indices' returns.

MARKET OUTLOOK & PORTFOLIO POSITIONING

Taking this all together, we believe investors would be well served by selecting companies with durable competitive advantages, strong balance sheets, and consistent free-cash-flow generation. Emphasizing dividend growth as a signal of financial strength and management discipline would also help identify the “right” types of companies.

Looking ahead, we expect markets to remain influenced by a mix of resilient economic growth, persistent inflation uncertainty, and shifting Federal Reserve policy. The volatility in Treasury yields during the third quarter underscores how quickly sentiment can change as investors balance the prospects of slower growth against the risk of prolonged tight monetary policy.

While large-cap technology and a handful of Consumer Discretionary names have carried the broader market leadership in recent quarters, we believe opportunities are broadening. At the same time, headwinds remain. Margin pressures in Consumer Staples and select Financials illustrate how higher costs and uneven demand can weigh on certain business models. This environment reinforces the value of focusing on companies with pricing power, resilient cash flows, and a proven commitment to dividend growth.

A dividend growth discipline emphasizing quality, balance-sheet strength, and sustainable payout growth could help an investor navigate volatility effectively while potentially capturing upside as leadership broadens. We believe this approach provides both resilience in uncertain markets and the potential for attractive risk-adjusted returns for long-term investors.

Sources:

1. Credit is Key for Data Center Financing | Thoughts on the Market
2. AI boom may drive over 60% surge in US nuclear capacity by 2050 | Insights | Bloomberg Professional Services
3. S&P 500 Dividend Aristocrats | S&P Dow Jones Indices

CRN: 2025-1003-12902 R

 The opinions and views of this commentary are those of Brentview Investment Management and are not necessarily that of Advisors Asset Management.