By Al Root

In a market that demands playing defense, dividend payers haven't been the safe play they historically have been. But there are still ways for investors to get their income and some positive returns, as well.

It has been an ugly few weeks for the stock market. The S&P 500 index had dropped for four consecutive days before eking out a 0.81-point gain on Wednesday. And no rally has felt safe, with early strength often turning to weakness. Against that backdrop, dividend-paying stocks should be doing well, especially as the 10-year Treasury yield slumps to 4.25%, down from 4.80% in January.

They haven't. The average dividend stock in the S&P 500 suffered losses of 3.8% over the past three months, worse than the index's average 2.8% decline. Dividend aristocrats -- financially strong companies that have raised their annual payouts for 25 consecutive years -- aren't fairing any better. They, too, suffered losses of 3.8% on average over the past three months. Almost 70% of the 69 aristocrats posted negative returns over the past three months, compared with 60% for dividend payers and all S&P 500 stocks.

And don't bother with the highest-yielding stocks in the S&P 500. They suffered losses of 5% over the past three months. High-yield stocks are often the cheapest, as well, and they're typically cheap for a reason, says Wolfe Research Chief Investment Strategist Chris Senyek. They include chemical maker Dow, which yields 7.2%, and California utility Edison International, which yields 6.3%.

Senyek recommends that investors look at the stocks in the "second quintile" of yields -- the 20% of stocks with the highest dividend yields after the top fifth. They have an average loss of 2.5%, beating the average stock and dividend payer in the S&P 500, as well as the highest-yielding shares. They also yield 2.9%, above the S&P 500's 2.3% among dividend payers. EOG Resources and Mondelez International are two standouts in the group. They returned 0.4% and 2.6%, respectively, over the past three months; both are expected to grow earnings in 2025, and both yield about 3%.

But let's face it -- finding positive returns among dividend strategies hasn't been easy. Companies that increased their dividends faster than the average S&P 500 dividend payer over the past year returned about 1% in the past three months. For dividend growth, investors can use the $31 billion iShares Core Dividend Growth exchange-traded fund (ticker: DGRO) or the $50 billion Vanguard Dividend Growth fund (VDIGX), which yield 2.4% and 1.8%, respectively.

Three growers stand out. 3M, which yields 2%, has returned to growth after effectively cutting its dividend after spinning off its healthcare business, Solventum, in April 2024. 3M started paying 70 cents a quarter after the spin, down from $1.51 beforehand, but raised its quarterly payout to 73 cents a quarter in February. The increases should continue -- 3M is set to grow earnings by 7% in 2025.

AT&T, with a yield of 4.2%, also looks like a winner. Its earnings and free cash flow are expected to be stable in 2025. In January, the stock was upgraded to Outperform from Sector Perform by RBC analyst Jonathan Atkin, who cited reduced costs and "stronger confidence in AT&T's growth and shareholder return profile vs. peers" for the rating change.

Abbott Laboratories is also worth a look. Though shares yield only 1.7%, lower than the S&P 500's 2.3%, earnings and free cash flow are expected to grow by 10% and 30%, respectively, in 2025, due to strong growth in its medical devices business. That should allow for plenty of dividend growth in the future.

Dividends alone may not be enough to offer safety. Income, earnings growth, and stability, however, rarely go out of style. B

Write to Al Root at allen.root@dowjones.com

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(END) Dow Jones Newswires

February 27, 2025 02:30 ET (07:30 GMT)

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