In the prevailing uncertain macro environment, income investors face the familiar yet increasingly difficult question of whether to favor high-yield dividend stocks for current cash flow or to prefer dividend growers with lower yield but greater compounding potential.
The answer is not easy. Persistently high interest rates, stubborn inflation and mixed corporate earnings have prompted investors to reconsider the risk-return trade off for dividend strategies.
Investors who usually relied heavily on dividends from stable dividend payers are now favoring the appeal of riskless yields in Treasuries and other money market funds. At the same time, concerns about earnings pressure and margin compression in some sectors add complexity to determining the reliability of dividend growth.
Understanding the yield-growth trade-off
In the current environment of dividends, income investors need to evaluate two choices.
High-yield stocks provide current income at a generous level with a generous yield, typically found in industries like utilities, telecom, REITs and energy. Dividend growth stocks pay lower yield to start but increase distributions as the companies consistently earn and reinvest.
In volatile or risk-off environments, high-yield stocks offer positive cash flow compared to bonds but often carry considerable risk.
Companies in high yield sectors are capital-intensive businesses that usually operate with considerable debt and pay out most of their earnings in dividends. In sectors that have payout ratios above 75% (or over 100% payout ratios), there is not much margin for error as companies may not be able to sustain dividend payments if earnings fall.
Furthermore, companies with payout ratios that are too high (greater than 75%) tend to decline worse than the overall market during periods of market stress.
(Real estate investment trusts and business development companies operate under U.S. tax regulations that require them to pay out at least 90% of net income to shareholders.)
Dividend growth stocks, on the other hand, tend to have moderate payout ratios with respect to their earnings. Companies that raise dividends over the long-term (like Dividend Aristocrats, or companies that have raised dividends for 25 consecutive years) show the power of compounding over the long term, whereby reinvested dividends greatly add to total returns.
A selection of research studies — one is Ned Davis Research — have shown that dividend growers have long-term outperformed high yielders, while providing better risk-adjusted returns and lower volatility through multiple market cycles. In the end, the decision will depend on each investor’s tolerances and preference:
- For investors needing steady income, a riskier yield could be considered.
- For investors wanting to grow wealth sustainably over time, dividend growers will generally deliver better long-term outcomes in connection with reinvestment and smoother growth in dividends.
In today’s uncertain environment, the management of immediate cash flow with dividend sustainability and growth potential has never been more important — and more complex.
Macro pressures reshaping dividend strategies
Dividend strategies are being challenged as the macroeconomic environment continues to change. High interest rates, constant inflation and a conservative Federal Reserve have created a new environment for income focused investors and this has had ripple effects throughout the equity markets.
The 10-year U.S. Treasury yield hovers around 4.4%, and fixed-income alternatives (in an environment of positive interest rates) offer better yields while also possessing much less risk.
When the returns on investment through the equities available to the income investor are below rates available from CD’s and bonds with predetermined returns, the returns on dividend-paying equities — particularly equities that pay dividends that are stagnant or low — have become less attractive on a relative basis.
Income seeking investors are becoming predisposed to the certainty of bonds and CD’s over having to deal with volatility in the equity markets. Even the average S&P 500 dividend yield, currently around 1.3 percent, is being meaningfully displaced by alternatives that are risk-free.
At the same time, there are pressures on corporate profit margins. Higher costs of inputs and wage inflation is compressing corporate profits to varying degrees, and particularly for companies in competitive settings with limited ability to raise prices. When earnings get squeezed, the risk of a dividend cut increases unless wages and costs come down.
This context has complicated the task for companies of justifying a dividend increase, or even a dividend hold, without denting the balance sheet. Income investors are faced with the challenge of considering the appeal of yield versus the sustainability of payouts, making it critical to reassess what constitutes attractive yield in stocks today.
Sector breakdown: where yield and growth reside
The traditional yield sectors, such as REITs, utilities and telecom in the U.S. have already experienced headwinds with rising interest rates driving up borrowing costs and pressuring a valuation. U.S. equity REITs are off approximately -9.1% year-to-date in 2025 vs. the broader market return.
Global REITs are expected to generate total returns of 8-10% in 2025 while providing yields of 3.5-4.0% (roughly 3x the average S&P 500 dividend yield). Utilities and telecoms are under similar valuation pressures. Many utilities have high dividend payout ratios and find themselves relying on debt financing, meaning their equity valuation will be depressed under rising rates.
The sectors associated with dividend growth, such as health care, industrials and selective tech and consumer sectors, are displaying better fundamentals. Several large banks raised their dividends in Q2 2025, including JPMorgan JPM , which grew its dividend payout by 20% in Q2, and Citigroup , Wells Fargo WFC and Goldman Sachs GS increased theirs between 11-33% (all driven by strong earnings growth and manageable leverage).
The Dividend Aristocrats NOBL , strong companies known for consistently paying and increasing dividends over long periods of time, are always in the spotlight. Utilities like Eversource Energy, recently added to the Aristocrats index, generally provide a great intersection of stable businesses and dividend growth history — 4.5% yield, and 5.9% dividend growth.
How investors are adapting portfolios
Income-focused investors are adapting their approaches. One strategy that is common is the combination of dividend-growth and high-yielding stocks with fixed income.
A Global X whitepaper says a better approach is combining dividend growth and high yielding stocks to create a better mixed yield income (immediate income while experiencing compounding over time). UBS similarly estimates strategies that combine dividend growth, high yielding equities and income from options can achieve an estimated 5–7% total yield annually.
Many investors are investing via dividend focused ETFs, which can be helpful in implementing hybrid investment strategies. Some ETFs are focused on high yield, while others focus on dividend growth.
Some examples of widely held top rated ETFs are Schwab U.S. Dividend Equity ETF SCHD , Vanguard’s High Dividend Yield ETF VYM and SPDR S&P Dividend ETF SDY . These ETFs have all outperformed the S&P 500, especially in down markets.
Investors should also consider the important differences: dividend-growth ETFs, most particularly dividend aristocrats, tend to have the same level of stability to a dividend growth yield ETF, while also tracking a sustainable payout; yield driven ETFs focus more on current income but instill higher levels of risk in a slowly growing economy.
Laddered income strategies are becoming increasingly popular. Some investors are creating a bond ladder using short to intermediate-duration bonds or structured income vehicles to lock-in today’s rates for a later reinvestment, while still keeping future investments flexible. This can help mitigate duration risk and interest rate sensitivity.
As investors are evaluating income possibilities, key financial metrics have become important for decision-making purposes: dividend coverage ratios, payout ratios and forward earnings guidance. The better quality dividend growers can usually be identified since they have moderate payout ratios and strong cash flows.
Income portfolios that are going to work in 2025 are adaptive income strategies that define an emphasis on income generation and capital preservation. A disciplined combination of dividend yielders, dividend growers, a selective ETF approach and combined bond income tools can help investors manage market cycles while targeting long-term investor goals.
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