Dividend stocks are primed for a comeback in 2025

Dividend-paying stalwarts such as JPMorgan Chase and Merck are primed to fare better in the coming year, some investors said. With highflying tech stocks looking expensive and falling interest rates potentially denting the appeal of bonds, dividend shares look good, they said.

Investors typically flock to the dividend payers in down markets or when the economic outlook turns cloudy. Indeed, many companies with big payouts, including utilities and consumer staples, produce stable earnings in any weather. In rallies, though, their shares tend to lag behind. This has been especially true since 2020, when mega-tech stocks such as Tesla and Nvidia have led the market to frequent record highs.

The performance gap between the S&P 500 and the dividend stocks has widened this year. But “that’s when you should be buying” dividend stocks, said Chris O’Keefe, portfolio manager at Logan Capital Management.

Logan Capital’s dividend performers portfolio has added more financial stocks recently, including Regions Financial. Visa and Raymond James Financial are the portfolio’s largest overweight positions, according to O’Keefe. He added that healthcare stocks are inexpensive, and it is likely companies in that sector will boost their dividend payouts over time.

That would be a welcome sight for dividend investors, as large U.S. companies’ payouts haven’t kept pace with the market’s rally. This week, the S&P 500’s dividend yield, which measures dividend payouts relative to stock price, hit a 20-year low when it dropped below 1.19%.

The S&P 500 Dividend Aristocrats Index, which includes 66 companies that have raised their dividends every year for the past 25 years, has struggled to keep pace with the broader market since 2020. Big dividend payers staged a comeback in 2022, as fears of a recession drew investors to utilities, consumer goods and other steadier sectors.

The moment was short-lived; by 2023, rising interest rates began to lift the returns of bonds and money-market funds above what dividend stocks yielded. Major companies tightened their grip on cash as they adopted a sit-and-wait approach toward economic uncertainty. And this year, many of the same dominant stocks of the Covid era are once again leading the market to record highs.

The top-heavy S&P 500 has produced a total return of 28% this year, including price gains and dividend payments, well ahead of the S&P 500 Dividend Aristocrats’ 14%. Dividend exchange-traded funds from BlackRock, Charles Schwab and Vanguard returned between 13% and 20%.

A dividend comeback could be in the cards, according to Bank of America analyst Ohsung Kwon. His team predicts overall dividends by S&P 500 companies will increase by 10% in 2025. That is because investors want cash.

In a sign of the demand, even big tech companies have started to pay dividends, with Meta Platforms and Alphabet offering payouts to shareholders this year for the first time. They contributed about 25% of total U.S. underlying dividend growth in the third quarter, according to Janus Henderson.

Earlier this week, shares of AT&T rose sharply after the telecommunications company—a former S&P 500 Dividend Aristocrat removed from the index for cutting its dividend—said it planned to return more than $40 billion to shareholders over the next three years through stock buybacks and dividends. Then, on Wednesday, Walt Disney said it would boost its annual dividend by 33% next year.

Predicting how high-dividend stocks will fare under a new administration is never easy. In theory, President-elect Donald Trump’s proposed policies such as reshoring and increased drilling could benefit “old economy” companies, said Brian Bollinger, the founder of Simply Safe Dividends.

“If you look at 2016, you saw the same knee-jerk reaction,” said Bollinger, whose company rates the dividend safety of about 900 companies. But of the sectors that initially outperformed the S&P 500 after election day, consumer discretionary was the only one to maintain its lead by early 2020, he said.

Haverford Trust, which has more than $15 billion under management and consultation, has owned shares of S&P 500 Dividend Aristocrats Johnson & Johnson and Coca-Cola since its inception in 1979. This year, the fund purchased shares of Alphabet when it initiated a dividend, and Nvidia following its stock split and dividend hike.

Hank Smith, the fund’s head of investment strategy, still views old-school dividend payers as safer bets compared with the broader market. “The idea that a handful of companies or two handfuls of companies can drive a 500-stock index up indefinitely just defies the law of math, law of averages,” Smith said.

This year, Haverford Trust saw high dividend yields from tobacco companies Altria Group and Philip Morris International, as well as healthcare players Pfizer, Merck and Bristol-Myers Squibb. Smith said he doesn’t believe those dividends are at risk, and investors are getting modest increases each year.

“You can find yield, but it’s clearly much harder than it was 10, 12 years ago,” Smith said.

Write to Jasmine Li at jasmine.li@wsj.com