Episode Summary
Executive Summary: This episode of The Morning Filter features Dan Lefkowitz, Morningstar Indexes strategist, discussing dividend stocks ahead of the new year. The conversation covers 2025 dividend stock performance, the impact of AI and stock buybacks, international dividend opportunities, and metrics for assessing dividend sustainability like payout ratio, economic moat, and distance to default. Dan also explores dividend growth investing and provides an outlook for 2026.
Main Topics: 2025 Dividend Stock Performance & AI's Influence (Priority: 5/5): Dividend stocks have lagged the broad US market, mainly due to underweighting red-hot AI/tech stocks like NVIDIA. Sectors like utilities have outperformed due to AI-driven power demand, while REITs and energy have struggled. The Stock Buyback Boom vs. Dividends (Priority: 5/5): 2025 marks the fifth straight year where buybacks exceed dividends (~$1 trillion vs ~$750 billion). Buybacks offer flexibility and tax advantages, reducing US dividend yields. This trend is largely US-specific, with international markets still favoring dividends. International Dividend Stocks Opportunity (Priority: 4/5): International dividend stocks have outperformed both US dividend stocks and broad international markets this year. The Morningstar Global Markets XUS Index yields over 3% vs 1.1% for the US, driven by strong European banks and a weaker US dollar. Tax implications exist for US investors. Metrics for Dividend Sustainability (Priority: 4/5): Dan discusses three key metrics: payout ratio (avoid over 75%), economic moat (wider moats = more sustainable dividends), and distance to default (a quantitative measure of financial health). Historical dividend record is less predictive. Dividend Growth Investing Landscape (Priority: 3/5): Dividend growth strategies target companies increasing payouts, offering defensive orientation and less volatility. The universe is evolving with more tech stocks (Apple, Microsoft, Broadcom) entering. Performance falls between growth and high-yield strategies. Outlook for Dividend Stocks in 2026 (Priority: 4/5): Dan suggests US equity market looks frothy, especially tech/AI. Valuations appear more reasonable on the value side and in small caps, where many dividend payers reside. Dividend stocks could benefit from a rotation or market volatility.
Key Arguments: Dividend stocks have underperformed the broad US market in 2025 primarily due to AI/tech concentration; neglecting NVIDIA alone creates a massive disadvantage. Utilities have transformed into growth stocks thanks to AI-driven power demand, outperforming the broad market this year. The US buyback boom ($1 trillion vs $750 billion in dividends) depresses dividend yields, which has fallen to 1.1% from historical 3-6%. Buybacks offer flexibility and tax advantages over dividends, which are considered 'sacrosanct' and punished if cut. International dividend stocks yield over 3% and have outperformed due to strong European banks, weaker US dollar, and less tech concentration. Payout ratio (above 75% is risky), economic moat (moated companies sustain dividends better), and distance to default are better forward-looking predictors than dividend history. Dividend growth investing provides a defensive orientation and has held up better during sell-offs (2022, 2018). The Morningstar Dividend Yield Focus Index screens on both economic moat and distance to default, built defensively after the 2008 crisis. US equity market appears frothy, especially AI/tech; value and small-cap areas with dividend payers look more attractive for 2026. Technology is less dominant overseas, making international dividend investing less vulnerable to AI-driven concentration risk.
Data Points: Dividend yield: US market: 1.1% - Current yield on US equity market, down from historical 3-6% Dividend yield: International ex-US: Over 3% - Morningstar Global Markets XUS Index yield Buybacks vs Dividends: ~$1 trillion buybacks vs ~$750 billion dividends - 2025 fifth straight year buybacks exceed dividends Payout ratio threshold: 75% - Morningstar screens out companies with payout ratio over 75% as risky NVIDIA market cap: Over $3 trillion - Neglecting NVIDIA is a massive relative detractor for dividend portfolios US dividend stock outperformance vs market (2022): Dividend sector held up well - During 2022 sell-off, dividend-paying stocks performed much better than broad market Likely dividend cutters mentioned: Multiple - Examples: Dow Chemical, Walgreens, 3M, Intel, Shell Oil (2020)
Pivotal Quotes: "There's an old expression that buybacks are like dating, dividends are like marriage. And I think that is apt." — Dan Lefkowitz: Explaining the difference in commitment between buybacks and dividends "Dividends are kind of considered an old economy. They're considered something that you do when you don't have something better to do with the cash." — Dan Lefkowitz: Discussing Silicon Valley's cultural preference for buybacks over dividends "Just because a company has a 5, 10, 15, 50 year record of paying out a dividend doesn't mean it's going to continue." — Dan Lefkowitz: Warning that dividend history is not a reliable predictor of future sustainability
Implications: Investors seeking income may need to look internationally or accept lower US yields. Dividend sustainability is better assessed via payout ratio, moat ratings, and financial health than history. Dividend growth strategies offer defensive balance. 2026 could favor dividend payers if tech valuations correct or rotate.
About The Long View
Expand your investing horizons and look to the long term. Join hosts Christine Benz, Dan Lefkovitz, and Amy C. Arnott as they talk to influential leaders in investing, advice, and personal finance about a wide-range of topics, such as asset allocation and balancing risk and return.