Michael Clarfeld, Portfolio Manager, ClearBridge Investments, examines how dividend paying investments can provide the consistency investors need in uncertain markets.
Equity markets have been no stranger to volatility in 2025, with sharp moves and shifting narrative, keeping investors on edge. Yet beneath the surface-level turbulence, the US economy remains fundamentally sound, marked by structural strengths that are often under appreciated in headline-grabbing commentary. In this environment of uncertainty, dividend growers offer a time-tested playbook – blending downside protection, steady income, and long-term growth potential.
The US economic engine, continues to benefit from durable tailwinds driven from attractive demographics, a resilient labour market, an unmatched culture of innovation across sectors, secure and accessible capital markets, and energy independence. These features don’t just endure momentary disruptions; they transcend them. As investors search for opportunity amid uncertainty, we see the US market as fertile ground for those positioned with the right strategy.
Broadening Market Dynamics Favor the Overlooked
Recent years have seen a narrow market dominated by a handful of mega-cap growth stocks. Today, the top 10 constituents of the S&P 500 account for 35% of the index, which is above the historical 24% threshold that has often preceded outperformance by equal-weight strategies. History suggests that when leadership broadens, areas like dividend growers can take centre stage, these are often overlooked in momentum-driven rallies.
We saw similar inflection points in the late 1990s and early 2000s when highly concentrated markets eventually gave way to more evenly distributed performance. During those periods, dividend growers meaningfully outpaced the broader market, delivering compelling total returns for patient investors.
Why Dividend Growers Now
This shifting market structure coincides with macroeconomic crosswinds that demand a focused, disciplined investment approach. Inflation pressures, exacerbated by tariff frictions and elevated long-term interest rates, persist even if they’re not dominating the headlines. Moreover, policy uncertainty, especially in an election year, introduces a level of market noise that makes clarity and consistency especially valuable.
Dividend growers offer three vital attributes for this environment. First, downside protection. With equity valuations near historic highs and the S&P 500 having rebounded nearly 60% over the past two years, valuation risk is a growing concern. Dividend-paying equities, particularly those with a history of consistent increases, have historically outperformed during downturns due to their relative value and investor appetite for cash flow resilience. This occurred earlier in 2025, when dividend growers exhibited notable strength amid market pullbacks.
Second, current income. In big bull markets investors tend to overlook dividends. When a handful of mega cap growth stocks drive the preponderance of equity market performance, people predictably focus on capital appreciation. But bear markets remind us that dividends, albeit prosaic, are responsible for 40% of total return over the long term. In flat-to-down markets, meanwhile, dividends provide a cash flow return to investors that offsets share price stagnation or depreciation.
Third, growth. While strong upfront yield is attractive, the real power of equity is in its long-term compounding and growth. Unlike bonds, which typically offer fixed coupons, dividend-paying equities have the potential to offer rising cash flow streams over time.
Looking Ahead
While the road ahead may remain uneven, our conviction in the strength of the US economy and the enduring appeal of dividend growers remains firm. Investors don’t need to chase market narratives or try to time sentiment swings. They need a playbook that works through cycles.
In our view, dividend-growing companies, with their combination of resilience, reliability, and reinvestment potential, fit that role perfectly. They may not always lead in up markets, but they tend to shine when consistency matters most.
And in today’s world of persistent uncertainty, consistency is a rare and valuable asset.
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