Plus, several undervalued stocks to buy with stable dividends.
Today on The Long View, we’re featuring an episode from another Morningstar podcast, The Morning Filter, which you can subscribe to on Apple podcasts or wherever you get your podcasts.
In this special episode of The Morning Filter podcast, co-host Susan Dziubinski sits down with Morningstar columnist Dan Lefkovitz to take a deep dive into dividend stock investing today. They discuss what’s caused U.S. dividend stocks to lag this year while international dividend stocks have outperformed. Tune in to find out why the stock buyback boom is bad news for dividend seekers and what metrics investors should look at if they want to avoid dividend cuts.
They name drop a few undervalued stocks that Morningstar thinks have stable dividends, cover why dividend growth stock investing is underappreciated, and close with a discussion about whether dividend stocks are poised to outperform in 2026.
Episode Highlights
Read about topics from this episode.
Stock Buybacks Are Booming in 2025. That’s Bad News for Dividend Investors
The Surprising Truth About Dividend Growth Stocks
Not All Dividend Stocks Are Safe. Here’s How to Avoid Dividend Traps
Why International Dividend Stocks Have Pulled Ahead
Got a question for Dave? Send it to themorningfilter@morningstar.com.
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Dave Sekera on LinkedIn: https://www.linkedin.com/in/davesekera
(Please stay tuned for important disclosure information at the conclusion of this episode.)
Christine Benz: Hi, it’s Christine Benz, co-host of The Long View podcast. Today, we’re bringing you a bonus episode from another Morningstar podcast we think you will enjoy: The Morning Filter. Every Monday, Morningstar’s Chief US Market Strategist Dave Sekera and Susan Dziubinski, investment specialist for Morningstar, talk about what investors should have on their radars for the week ahead, can’t miss Morningstar research, and a few stock picks or pans for the week ahead. On this special episode of the show, Dan Lefkovitz, Morningstar columnist and former co-host of The Long View, sits down with Susan to discuss everything investors need to know about dividend stocks going into the new year. It’s a great listen, and we hope you like the show.
Susan Dziubinski: Hello, and welcome to a special post-Thanksgiving episode of The Morning Filter podcast. I’m Susan Dziubinski with Morningstar. Today, I’m sitting down with Morningstar Indexes Strategist Dan Lefkowitz to discuss dividend stocks. Dan is a columnist for Morningstar.com and co-host of another Morningstar podcast called The Long View. During our conversation, Dan and I will cover how and why dividend stocks have performed the way they have this year, what the stock buyback boom means for dividend stock investors, how to spot a dividend that’s unsafe, and more. We’re having this conversation on Wednesday, Nov. 19.
Well, Dan, thanks for joining me today on The Morning Filter.
Dan Lefkovitz: Always good to be with you, Susan.
Dziubinski: Now, I’m usually doing this Monday mornings from my home office with coffee, so I have the coffee, even though it’s not Monday morning from my home office.
Lefkovitz: I’ll try to keep you awake.
Dziubinski: Thank you very much. I appreciate it. OK, so Dan, dividend investing isn’t necessarily your specialty, but it’s a topic that you go back to time and time again as a columnist. Why is that?
Lefkovitz: Yeah, I think bottom line, dividends are really important to investors. By my count, there’s over $1 trillion in funds and ETFs that screen for dividends or dividend-weighted on a global basis. And over the years, our team at Morningstar Indexes has developed a lot of different dividend-weighted, dividend-screened indexes from high-yielding equities to dividend growth to combining dividend buybacks. And I happen to think that dividend investing is just a good way to participate in the equity market, not just for income, but also for total return.
Dziubinski: All right. Well, we’re going to unpack a large part of that today, so glad you’re with us. So let’s start out with a little bit of an update for our audience on the performance of dividend stocks so far in 2025. How have they held up compared to, say, the broad US stock market?
Lefkovitz: Yeah. So as of today, most of our dividend indexes have done well in absolute terms, but they’ve lagged the overall US equity market, not by a massive margin, but by a few percentage points, and the reason is really AI and technology. When you invest for dividends, you tend to have less exposure to technology stocks than the broad market. Broad US equity market now is very, very heavily weighted to technology stocks, especially AI stocks. Just neglecting Nvidia NVDA would be a massive detractor to any portfolio on a relative basis. It’s past $5 trillion in market cap. So I really blame AI.
Dziubinski: There you go. That sounds fair. So there also seems to be a bit of really a split in the performance this year of some of those sectors that we often associate as being dividend-rich. So you have financials and utility stocks doing quite well this year, and then you have more real estate REITs and energy stocks are struggling. Talk a little bit about those variations in performance.
Lefkovitz: Yeah, it’s a great point. There is a lot of diversity within the dividend-paying section of the market. You could add industrials in there. You could add healthcare. But just to focus on those sectors that you mentioned, speaking sort of in broad terms, because sector dynamics, you’ve got your sector dynamics, you’ve got industry dynamics, you’ve got company-specific dynamics. But utilities, let’s start there. That’s been an amazing story. And it’s really a great example of how sectors can change. So you think of utilities as really boring, kind of steady-Eddie, almost bondlike regulated utilities. They’ve turned into a growth sector. And again, I blame AI. The power demand for AI processing is really, really high. And we’ve seen power demand increase and utility stocks have done really, really well, outperformed the broad market this year because of that AI-generated demand.
Financials is kind of a mixed picture, actually. The overall sector has done decently. I wrote recently about regional banks having some troubles related to the credit markets. But the big money-centered banks like JP Morgan JPM and Bank of America BAC have had a strong year. Credit card companies have done well. Insurers have done well. I’d say interest rates that remain elevated have helped some of the banks. An economy that remains fairly robust has helped the overall sector and deregulation has been a catalyst there as well. Now, on the negative side, you mentioned REITs. That’s a sector where higher interest rates have kind of weighed on the overall property market. We know the residential housing market is not exactly rip-roaring. Office is still kind of weighed on by the hybrid work. Commercial is being weighed on by e-commerce. And then the energy side, we all know that the prices at the pump are lower. The oil price has been weak this year due to oversupply and some weakness on the demand side as well.
Dziubinski: Now, let’s talk a little bit about dividend stocks globally. You wrote a great column earlier this year talking about how international dividend stocks at that point in time were really sort of outperforming US dividend stocks. So I want to explore that. Let’s first start out with, that was sort of toward the beginning of the year, I think you wrote that in the first quarter. So now that we’re in the middle of November, is that still kind of holding, where we’re seeing international dividend stocks outperforming?
Lefkovitz: Yes. Overall, international stocks have outperformed US stocks, full stop. But then you’re right, dividend section of the market has outperformed. Now, international dividend stocks have outperformed broad international markets as well, which is a contrast to the US. But sorry, just going back to your original question about international versus US and the dividend stocks, Europe has had a really strong year. Emerging markets have had a strong year. Banks, especially in Europe, which are rich in dividends, have really performed well this year. And then the depreciation of the US dollar has really been a factor, amplifying returns for all international stocks from the perspective of US investors that are holding unhedged exposure to foreign stocks.
Dziubinski: So that pretty much sums up why they’ve had a performance advantage this year. Has the advantage been sort of longer than this year?
Lefkovitz: Yeah, it has. So, like I said, international dividend stocks have outperformed the broad international equity market, which is in contrast to the U.S. and technology is just less of a factor. It’s a smaller chunk of the market overseas. So that’s part of it. And financial services are just a bigger part of the market internationally, and it’s rich in dividends, and it’s performed well.
Dziubinski: Now, you say here in the US—I’m talking about another column you wrote this year about dividends—that we’re in the middle of what you’re calling a “stock buyback boom.” And you say that that is something that dividend investors should be aware of and that it might be actually to their detriment. So first, define what you mean by a boom here, Dan.
Lefkovitz: It’s really been going on for a couple of decades. But 2025 is going to be the fifth straight year in which more money is being spent on share repurchases by companies than dividends. About a trillion dollars this year in buybacks and about $750 billion in dividend payments. And it’s happening for a lot of reasons. You know, there are tax advantages, of course, to the share repurchase. Dividends are taxed if you’re holding them in a taxable account. Whereas if a company repurchases its shares, as long as you don’t sell those shares, if you’re a holder, your fractional ownership of the company increases.
There’s an old expression that buybacks are like dating, dividends are like marriage. And I think that that is apt. The dividend commitment is really considered sacrosanct by many in the US market, especially if you commit to a quarterly payout to shareholders, the market expects that. And if you withdraw it or you reduce it, the market punishes you. So buybacks can be more opportunistic when the company has cash on hand or really preferably when the shares are undervalued.
Dziubinski: Right, right. As opposed to when they look expensive and you’re buying them back. So the main reason then, why is the main reason you think that companies are doing more buybacks than dividends—simply because they don’t want the commitment? Or is there some advantage to the company to doing it?
Lefkovitz: I think the flexibility. I think another part of it is that technology companies just seem to prefer buybacks. I think dividends have a little bit of a stigma. It’s just the culture of Silicon Valley. Dividends are kind of considered old economy. They’re considered something that you do when you don’t have something better to do with the cash, reinvestment, R&D, that sort of thing. So I think there’s multiple factors.
Dziubinski: OK. So then let’s talk a little bit about what this buyback boon then means for dividend investors. Those people who do want the—they want the cash in hand, Dan. They don’t necessarily want their share buybacks. What does it mean for them?
Lefkovitz: Yeah. It’s just lower yields. So if you go back to last century, historically, the yield on the US equity market was between 3% and 6%. Now it’s 1.1%. That’s come down. That’s even low by the standards of the past 25 years. But the dividend yield has just generally been much lower over the past 25 years than it used to be. So it’s harder to get equity income from U.S. stocks than it once was.
Dziubinski: Let’s go back to international dividend stocks. Then you said in your column that this buyback boom has been largely a US phenomenon. Why hasn’t it been more prevalent internationally?
Lefkovitz: Dividend, sorry, buybacks are less popular overseas than they are in the US. Part of it is that I mentioned, the dividend commitment, like marriage, if you reduce, you eliminate, you suspend your dividend payment, it tends to get punished in the US. That’s less the case overseas. Dividends in many markets can be paid out more opportunistically. The tax advantage that I mentioned isn’t as big, especially in Europe. We just haven’t seen buybacks take hold overseas the way they have in the US.
Dziubinski: You did suggest in your column that US investors could look to international markets for getting some dividend pickup if they’re looking for it but there are tax implications to be aware of.
Lefkovitz: Yeah, just to put some numbers on it, if you look at our index of international stocks, the Morningstar Global Markets ex-US Index, the dividend yield exceeds 3%. In the US, it’s 1.1% again. So there are some really nice yields to be had if you are willing to consider international stocks. But yes, there are tax implications. It is possible to get double taxed on the dividends depending on the company and depending on the market. So it’s important. It’s something to look into.
Dziubinski: Sure. Make sure you understand that before you dive in. You’ve established that dividend income is shrinking here in the US, which is not good news. So given that, it’s probably even more important than it’s ever been for investors who are focused on dividend stocks, that they really feel confident that those dividend stocks, that those dividends are secure and that they’re not buying a dividend stock that might be on the precipice of a dividend cut. Now, you’ve done some research about things that investors can look for if they’re trying to suss out, all right, how likely is this company to actually cut its dividend? Is dividend history one of those things you think investors should be looking at?
Lefkovitz: I would never say that history is unimportant and that you should ignore it completely, but I think it can be overemphasized and too much stock can be put in it. Just because a company has a five-, 10-, 15-, 50-year record of paying out a dividend doesn’t mean it’s going to continue. The past isn’t necessarily predictive. We’ve seen a lot of companies over the years that are considered dividend champions or dividend aristocrats, however they’re marketed, that end up reducing, eliminating their dividends.
Just to mention some names, Dow Chemical DOW was one this year that cut its dividend. We’ve seen Walgreens. We’ve seen 3M MMM. We’ve seen Intel INTC cut its dividend. Overseas, Shell Oil SHEL. They had a history of paying out dividends that went back to World War II when they cut in 2020. So just because a company has a long history doesn’t necessarily mean it will sustain its dividend going forward. And just something I’ll mention, you mentioned about that dividend durability and how important it is, it’s not just about the loss of income if a company cuts. It’s usually a sign of broader trouble, and it’s usually accompanied by a share price reduction as well.
Dziubinski: So let’s talk about some of the more forward-looking metrics, you think can be useful when you’re trying to suss out dividend stability. The first one you talked about in your column is payout ratio. First, define for our viewers and audience what that is, and then explain how it can be an indicator.
Lefkovitz: Yeah. So simply put, the payout ratio is the percentage of the company’s earnings that it pays out in dividends. And there’s kind of a happy medium where you want the company to be generous with how much cash it’s returning to shareholders. but not so generous that the dividend ends up being unsustainable.
Dziubinski: So what would you say? Is there such a thing, Dan, as a good payout ratio? Does that vary by industry? How can an investor know whether the number they’re seeing is reasonable for that company?
Lefkovitz: Yeah. So on a couple of our dividend indexes, we screen out any company that has a payout ratio over 75%. So if you’re paying over 75% of earnings in dividends, we consider that to be risky and unsustainable. Yes, in theory, a company, a sector, an industry that has more predictable earnings, less volatile earnings should be able to sustain a higher payout ratio. But, you know, as we talked about earlier with utilities, investment dynamics are always changing. You used to think of utilities as kind of steady-Eddies, and now they’re growth stocks. And, you know, there’s other sectors where the opposite has occurred. So to keep it simple, we just apply that 75% threshold across the board.
Dziubinski: That makes sense. So then your second dividend cut sort of predictor or metric to look to if you’re trying to figure out how secure a dividend is, is looking at whether or not the company has an economic moat. So before we talk about the relationship, first remind our audience what an economic moat is.
Lefkovitz: Yeah. So this is a metaphor that Warren Buffett came up with. Just like medieval castles had water that protected them from enemies, a company can have some kind of durable competitive advantage, some kind of structural feature that protects its profits from competition. And profits are important because they fund dividends.
Dziubinski: So now you have done some research with your colleagues looking at this relationship between dividend stability and whether or not a company has, you use Morningstar’s economic moat ratings, which are none, narrow, and wide. What sort of relationship did you see between dividend stability and moat rating?
Lefkovitz: Yeah. Companies with economic moats tend to sustain their dividend payments better than companies without moats. And we should say about the payout ratio, companies with lower payout ratios. Or let’s just say companies with high payout ratios tend to cut their dividends more frequently.
Dziubinski: Got it.
Lefkovitz: So both are good predictors.
Dziubinski: Now, your final metric is a little bit more difficult for an individual investor to necessarily get their arms around, but I still want us to talk about it because I still think it’s valuable. And that’s something that your team uses in constructing some of the indexes called “distance to default.” So define what that is.
Lefkovitz: Yeah, it’s a quantitative measure. I’m not going to reel off the Greek letter formula for you, Susan, but it’s a measure of financial health. And it looks, it incorporates, you know, balance sheet information, but also it looks at equity value and the equity price volatility, which is important, I think, you know, because the market can sometimes suss out financial distress and deterioration before it shows up in financial statements.
Dziubinski: So, then distance to default isn’t something that’s easily accessible. But we do have indexes that do use that distance to default metric. Is there one in particular that maybe you’d steer investors to to maybe look at some of the constituents as if they’re looking for, say, a short list of stocks that should have some dividend stability?
Lefkovitz: Yeah. Dividend yield focus is one that screens on both economic moat and distance to default measure. It’s interesting. I think we built that one in 2010. So it was in the wake of the financial crisis that kind of peaked in 2008. So it was really kind of a defensive-minded methodology that we built to screen companies that would be able to sustain their dividends and remain financially healthy.
Dziubinski: Now, I know you’re not in the business of giving out stock picks. That’s Dave Sekera’s job, and he’s not with us here today. But can you share a couple of companies that maybe look reasonably priced that are in that particular index that we could maybe say are, well, these are some pretty stable-seeming dividend stocks that are trading at attractive price multiples?
Lefkovitz: Yeah. So some companies in the Dividend Yield Focus Index that are attractively valued right now across economic sector: Merck MRK. Pepsi PEP. Kenvue KVUE. Alliant Energy LNT.
Dziubinski: OK. That sounds great. And again, for anyone who wants more information about any of those, they can go to Morningstar.com to do their research.
OK. So let’s pivot over to a related topic and that’s dividend growth investing. You touched on that sort of at the beginning of our conversation. Seems it’s like sort of a betwixt between because it’s not, you’re not really, if you’re a dividend growth investor, you’re not really looking for the highest dividends, but this isn’t purely the highest growth. These aren’t the highest-growth stocks you’re looking for either. Talk a little bit about what dividend growth investing is and why it could be an attractive strategy to pursue for an investor.
Lefkovitz: Yeah. So dividend growth is about targeting companies that are increasing their payouts to shareholders. If you think about it, companies that are upping their dividends are strong and strengthening. So they’ve got maybe improving prospects. It’s a way to kind of zero in on high-quality companies, companies with strong competitive positioning, maybe even economic moats. And it’s a strategy that is known to have a defensive orientation, so less volatile than the broad equity market.
Dziubinski: So I think you said at the top of the show, Dan, that US dividend stocks have as a group lag this year. So is that true of dividend growth stocks have also lagged the broader US market?
Lefkovitz: It is. They’ve performed decently in absolute terms, but a few percentage points—if you look at the Morningstar US Dividend Growth Index—it’s a few percentage points behind the broad US equity market.
Dziubinski: And we blame AI for that.
Lefkovitz: Absolutely.
Dziubinski: Just making sure we’re on the same page about that. OK.
Lefkovitz: Less volatile. Less volatile.
Dziubinski: Well, and that’s what I was going to ask next. So, have we seen dividend growth stocks, so maybe they haven’t quite kept up this year, because we have seen some volatility, especially recently, as you and I are sitting here, with that AI trade. Have we seen a little bit more stability with dividend growth stocks?
Lefkovitz: Yes. We’ve seen during selloffs this year, not just this year, but if you go back to 2022, 2018, those were down years for the broad stock market. And dividend growth has held up better during those selloffs.
Dziubinski: Now, you talked in your column about dividend growth stocks earlier this year that you’re seeing an evolution, a bit of an evolution, in that dividend growth stock universe. Tell us about that.
Lefkovitz: Yeah, we’re definitely seeing more technology stocks come into the dividend growth universe. I mentioned earlier that the culture of Silicon Valley is not so warm on dividends, but that’s kind of a gross oversimplification. Apple AAPL pays a dividend, and they’re in the dividend growth index. Microsoft MSFT is a technology stock that pays a dividend and is in there as well. Applied Materials AMAT is another company. I should also mention Broadcom AVGO, semiconductor maker. That’s in several, actually, of our dividend indexes, not just dividend growth. So it’s not necessarily the case that you get no technology exposure. Oracle ORCL is another one that is paying a dividend.
Dziubinski: But a lot of those tech companies aren’t sort of your big dividend-payers.
Lefkovitz: That’s right.
Dziubinski: They’re going to be more the dividend growth stocks, really.
Lefkovitz: That’s right. That’s right. And the yields, in many cases, are really low.
Dziubinski: OK. So then what do these changes to the this dividend growth landscape mean for dividend stock investors in terms of maybe what they should be expecting? Let’s say they own a managed product of dividend growth, either an index ETF or an actively managed dividend growth, should they have different expectations moving forward for performance or?
Lefkovitz: I like to say that dividend growth tends to perform in between the market and the high-dividends-paying section of the market. So when high-dividend-paying stocks are outperforming, dividend growth tends to lag but perform better than the market. And then the inverse is also true. When the market’s doing really well, dividend growth tends to be behind the market, but not as far behind as high-yielding equities. And I expect that general performance pattern to continue.
Dziubinski: OK. All right.
Lefkovitz: It’s more marketlike.
Dziubinski: OK. All right. So now, last question. And I saved the biggest for the last, Dan. I know you’re not a market strategist. I know you don’t have a crystal ball, but I’m going to ask you anyway. Considering what we saw with dividend stocks this year, where valuations are in the market, where we are with interest rates, where we are at the economy, where we are with tariffs, buybacks, all of valuations, what would you say are some things, our audience, if they are buying dividend stocks, should be keeping in mind for 2026?
Lefkovitz: Well, if I look at what our research and investment teams are thinking about going forward, you know, they think the US equity market is looking a bit frothy overall. They especially think that the technology sector, that AI-related stocks, many of those valuations look pretty rich. They think valuations are a lot more reasonable on the value side of the market, which is where a lot of dividend-paying stocks tend to be. Small caps is another area which they think are attractive as well. So I wouldn’t be surprised if there was further volatility and maybe a selloff or a rotation. I wouldn’t be surprised to see dividend-payers perform well. That’s definitely what we saw again in 2022 when the market was down big. Technology stocks were really selling off very dramatically. And the dividend-paying section of the market held up really well. Longer term, I just think dividend investing, whether it’s dividend growth or high yield, is just a good way to participate in the equity market, especially if you are, obviously, if you’re looking for income, but even if you’re just looking for more of a defensive approach.
Dziubinski: Well, Dan. I’ll hold you to that when I talk to you next year around this time. Thank you for your time. Happy holidays.
Lefkovitz: Thanks, Susan. Happy holidays to you.
Dziubinski: That’s it for this week’s episode of The Morning Filter. I hope you’ll join my colleague Dave Sekera and I next Monday at 9 a.m. Eastern, 8 a.m. Central for a new episode. Dave and I will be previewing the Fed meeting and unpacking his updated stock market outlook. You won’t want to miss it. In the meantime, please like this video and subscribe. Have a great week.
Benz: Hi, it’s Christine again. That was The Morning Filter podcast. If you enjoyed the show as much as we did, please subscribe on Apple Podcasts, or wherever you get your podcasts. We’ll be back soon for the latest episode of The Long View. Thanks for listening.
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