MW Dividend stocks are soaring in 2025, as investors adopt a defensive strategy amid market selloff

By Isabel Wang

A more challenging macro environment for stocks this year should create an appealing opportunity for dividend stocks to shine: Ned Davis Research

Investors have been on the hunt for ways to play defense, as concerns over economic growth and President Trump's tariff plans put Wall Street on edge. Against this backdrop, dividend stocks have soared this year, offering a place for investors to hide while generating appealing passive income.

U.S.-listed companies that pay dividends to shareholders have seen their stocks rally so far in 2025, outperforming the S&P 500 SPX and other major stock indexes. The $70 billion Schwab U.S. Dividend Equity ETF SCHD has advanced more than 3% year to date, while the iShares Select Dividend ETF DVY has popped nearly 4% and the SPDR S&P Dividend ETF SDY is up 3.3% in the same period. Their returns have significantly exceeded the 0.3% year-to-date slide for the S&P 500 and the nearly 4% decline for the growth-stock-heavy Nasdaq Composite COMP, according to FactSet data.

Shares of dividend payers on the S&P 500 have also jumped to multimonth highs when compared with large-cap stocks that don't pay dividends, according to Ned Davis Research.

"Dividend payers outperformed nonpayers by 4.3% in the five trading sessions ending Feb. 25 to bring the payers/nonpayers ratio to the highest level since Dec. 3," a team of Ned Davis' strategists led by Ed Clissold said in a Wednesday note. "Since Feb. 18, the top 25% of S&P 500 stocks by dividend yield are up 1.6% versus -2.6% for the lowest yielders, spiking the Highest Yielders/Lowest Yielders ratio to a five-month high," they said (see chart below).

See: These stock-market sectors are dominating the S&P 500 so far this year as investors play defense

Most dividend stocks are generally considered defensive investments, as companies that pay consistent dividends to shareholders are often more financially stable and have predictable cash flows. These companies tend to operate in less cyclical industries such as consumer staples, utilities and healthcare, making them less sensitive to economic downturns - thus helping investors to hedge portfolio risks.

Investors started to shore up portfolios with defensive names at the beginning of 2025 amid heightened concerns around a possible mix of resurgent inflation and stagnating economic growth. Growing uncertainty about White House's economic plans, including layoffs of federal workers by the so-called Department of Government Efficiency, has also caused American consumers and businesses to further question the outlook for the world's largest economy.

Meanwhile, worries around President Donald Trump's tariff policies toward major U.S. trading partners have also unleashed turmoil in the financial markets this week. The president said that tariffs on Canada and Mexico will take effect next Tuesday, when a 30-day pause on imposing the duties concludes. Trump also said his administration would slap an additional 10% levy on China, on top of a 10% tariff already imposed on Chinese imports earlier this month.

That's why some previously unloved corners of the stock market have quietly emerged as top performers in the S&P 500 so far this year. Shares of healthcare XLV, consumer-staples XLP and utilities XLU companies are among the best stock-market performers in the early months of 2025.

See: Jobless claims may have just fired the clearest recession warning yet - here's why investors should be worried

Of course, that outperformance has also been noticeable in the dividend universe.

"One would expect that companies that pay dividends are more stable and have lower growth rates. As a result, they should rally less in up markets and decline less in down markets. In other words, they have lower betas than non-dividend-payers. ... As a group, dividend-payers have a beta of 0.99 versus 1.11 for nonpayers," said Ned Davis's Clissold and his team.

Another macro factor that could impact dividend stocks is Treasury yields.

The yield on the 10-year Treasury note BX:TMUBMUSD10Y has dropped over 29 basis points so far this year, to trade at 4.284% as of Thursday afternoon - its second-lowest level of 2025. The 30-year rate Treasury rate BX:TMUBMUSD30Y has fallen 23.3 basis points in the same period, to 4.553% as of Thursday, according to Dow Jones Market Data.

Dividend-paying stocks would become more attractive as bond yields fall, as lower Treasury yields make these stocks a compelling alternative for income-seeking investors, said Larry Tentarelli, founder and chief technical strategist at Blue Chip Daily Trend Report.

To be sure, Treasury yields often fall in response to lower inflation or weaker economic growth. But this time, it's growth concerns that are taking center stage, Tentarelli said. "Generally, if bond yields come down because of growth concerns, then these defensive and high-dividend stocks tend to do much better [than the broader market]," he told MarketWatch in a phone interview on Thursday.

See: Trump's tariff push has spooked investors. Here's what it would take for him to step in to stop the selling.

However, Clissold and his team argued that the inverse relationship between dividend stocks and Treasury yields may not hold true over the long run.

"Dividend stocks have tended to outperform when bond yields have been rising [in the long term], and the reason is that stocks as an asset class have tended to perform poorly when interest rates have been rising," they wrote - adding that "a more challenging macro environment for stocks" later this year should create a more appealing opportunity for dividend stocks to shine.

U.S. stocks tumbled on Thursday, with the Nasdaq Composite suffering its worst day in a month and the S&P 500 turning negative for the year. The Nasdaq slumped 2.8% and the S&P 500 dropped 1.6%, while the Dow Jones Industrial Average DJIA fell 0.5%, according to FactSet data.

-Isabel Wang

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 28, 2025 07:00 ET (12:00 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.