Broadening markets? Opportunities for dividend growing companies
March 2026, From the Field
- Key Insights
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In two short videos, Tom Huber, Equity Portfolio Manager, discusses:
- Why dividends matter in today’s markets
- How dividend growth companies are participating in the AI buildout
Why dividends matter
Market leadership over the last number of years has come from a select group of companies. Currently, the top ten names represent 40% of the weight in the S&P 500, which is unprecedented and unusual. Many of the companies that have led are not the ones we see as part of our investible universe, given they don’t pay dividends or provide only nominal dividends that haven’t grown. It does appear, however, that there are signs of that market leadership changing to include a broader group of companies, especially with concerns over the monetization of the capex spent on AI by several of the Mag 7 companies. For us, growing dividends is a sign of a healthy business. By definition, if they're growing their dividend stream, they're growing their cash flow, their earnings and their revenues. These durable businesses generally perform well through most environments. When they lag, as we've seen the last number of years, it's typically in a more speculative market. The setup for owning these steadier, high-quality cash flow businesses that are still growing offers a combination of upside but also protection in the event the market isn’t cooperative. We can make a case of more muted returns over the next several years, just given the valuation multiples we're starting from, but that doesn't mean there aren't opportunities to do well as an investor. After a period of underperformance, the health care sector offers opportunity. Some examples are well-known pharmaceutical companies with very few patent exposures and long-lived assets, whether it's Gilead or AbbVie, trading at reasonable multiples and paying attractive dividends that are growing. Quest and McKesson are very steady compounders. They’re out of the regulatory spotlight, but very consistent growers.
Dividend investing in the age of AI
What’s exciting to us is there are ways to gain exposure to structural trends without sacrificing a dividend requirement, cash flow, and the durability of a business that we look for. This is where I think dividend growth is able to participate in the AI buildout through companies that aren't spending the capex but are benefiting from improved margins and free cash flow. From a market perspective, the primary beneficiaries of AI have been the companies that are spending on the infrastructure. We think there will be a point where this transitions from the spenders to the users, the enterprises that effectively integrate AI into their workflow for productivity, cost savings, and just being better at what they do. Chubb and the insurance sector serve as an example. Evan Greenberg, CEO of Chubb, believes the company can reduce 20% of the headcount over the next five years simply implementing AI into their workflow. This is pretty staggering. Caterpillar is another example. Their generators, which have historically been used just for backup, are now being used for primary power on data centers because there's such a shortage. A company that most people would know for earth moving, construction, mining now has a part of their business that is a direct beneficiary of the AI build-out. Even John Deere has talked about integrating AI into the data they collect from farmers and making it a real tool to improve yields while reducing costs for their customers. Data would show that dividend growth companies over the long term outperform the market, but it’s important to remember that while dividend payers come in and out of favor, dividends have historically contributed 40% of the total market return. By compounding value over time, dividends give the investor a bit of a smoother ride in the sense that while they may not keep up in a very narrow strong market, they’ve historically done well through a market cycle. And where dividend growth companies really shine is in lower-return or down markets, because their stronger cash flow dynamics tend to be better than average and the yield provides support for investors. Over a full market cycle, these companies have delivered attractive returns with lower levels of risk.
Thomas J. Huber, CFA
Portfolio Manager
Strategies to Consider
U.S. Dividend Growth Equity SMA
Our dividend growth strategy invests in undervalued companies with sustainable, above-average growth potential in earnings and dividends.
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