Dividends are back: the advantages they offer and how to take advantage of them
Investing in high-yield stocks, if done correctly, can generate favorable total risk-adjusted returns over the long term.
The creator of uncertainty
Stock markets experienced significant volatility last week, beginning Tuesday with a sharp drop driven by escalating trade tensions between the US and the European Union over Greenland’s sovereignty. Just when things seem calm and global economic growth is supported by a solid macroeconomic outlook favorable to the stock markets, President Trump can’t help but do everything he can to unsettle markets and investors.
In this context, the market tends to react to headlines , not to the fundamentals of listed companies. This leads to discounts and unusually asymmetric situations between quality stocks with dividend growth and the rest of the market, making it easy for patient investors seeking income to receive an exceptional gift by securing high returns through dividend growth.
The publication of corporate results is gaining traction
The earnings season for the fourth quarter of 2025 has begun. So far, we’ve only seen the results from the major US banks and the Taiwanese semiconductor manufacturer TSMC. All of them have reported solid results . I believe the earnings season will continue in this vein, especially in the US, driven by technology companies.
Currently, markets expect earnings growth of around 8% for the S&P 500 , while earnings for the European STOXX 600 are expected to remain flat for now and tend to exceed forecasts throughout 2026.
The alternative of investing in high-dividend companies
An investment strategy based on buying listed companies with solid balance sheets and thriving businesses that maintain a stable dividend policy can help avoid the tensions mentioned above and obtain a more than favorable return , especially when compared to the low level of interest rates in both Europe and the US.
In this way, it’s possible to generate a risk-adjusted differential return while simultaneously achieving a steadily increasing cash inflow, thus reducing the overall portfolio risk, which is even more relevant during periods of increased volatility like the current one. Even if the market enters a deep and prolonged bear market, the stability of this type of investment tends to outperform that of other market segments.
To achieve the above, companies with strong balance sheets , a defensive and sustainable business model, and operations in sectors providing essential services or products likely to remain in demand regardless of economic conditions are preferable. These companies should also have low debt levels relative to their earnings and high liquidity. This tends to ensure they can weather economic downturns without having to cut their dividend, thus maintaining a sustainable and growing dividend payout over time. The dividend must be well covered by the company’s cash flows and benefit from a future growth outlook that at least matches or exceeds long-term average inflation.
If the profitability threshold of those dividends is high enough in relation to alternative assets ( fixed income ) that also generate income, this should be able to prevent a massive sell-off on the Stock Exchange by investors of this type of shares in order to dedicate that liquidity to other types of companies or to other different types of assets.
How to implement the strategy
Currently, the average dividend payout for European companies in the category described is around 5.5%, and in the US it’s 2.75% (in USD). I’m referring to sectors such as utilities (power generation and distribution), large engineering and infrastructure management companies, REITs (Socimis), pharmaceuticals, and banks and financial institutions in general. Within all of these sectors, we can find quality companies that meet the requirements mentioned above.
For the vast majority of investors, a global investment fund or an ETF —or several, in fact—is usually more advantageous than direct stock market investment by buying shares. This diversifies across managers who have generated attractive dividend growth throughout their tenure and whose managed products align with the investment orientation defined here. This approach achieves more efficient diversification, although the final return may be somewhat lower due to management fees.
This strategy shouldn’t lead us to completely abandon the technology sector , which, as already discussed in this forum, isn’t in a bubble, although it does have more demanding valuations than other parts of the market. We’ll see the upcoming earnings reports (this week from Meta, Microsoft, Tesla, and Apple, whose reports will allow us to assess the strength of AI-related investments and their impact on margins and growth).
Conclusion for investors
Avoiding a concentration in big tech and related subsectors, in order to benefit from the dividend strategy described here, will likely be a winning strategy , although not the only one, for investing well in the stock market this year.