Dividend Stocks Close Earnings Gap with Tech, Offering Stability in Volatile Market

Dividend-paying companies are rapidly narrowing the earnings growth gap with technology stocks, contributing a more significant portion of earnings momentum to the S&P 500. This trend, marked by a substantial increase in earnings growth over the past year for dividend stocks, suggests that they may present an increasingly compelling case for investors seeking income and safety amidst a volatile market. The broadening of earnings momentum beyond the technology sector comes at a critical juncture, as investors grapple with heightened geopolitical risks, including a second military conflict in the Middle East within a year and an unprecedented shock to oil markets.

In the first quarter of 2025, the S&P 500 Dividend Aristocrats Index experienced a decline in earnings growth, registering at negative 5.5%. However, this metric saw a significant rebound, reaching positive 9% by the fourth quarter of the same year. Concurrently, the Nasdaq 100 Index witnessed a deceleration in its earnings growth rate, falling from over 35% in the second quarter of 2025 to under 15% by the fourth quarter.

Simeon Hyman, global investment strategist at ProShares, highlighted on CNBC’s "ETF Edge" podcast that the rotation away from the "Mag 7" technology stocks, which began even before the recent geopolitical escalations, warrants deeper investor consideration during this period of market uncertainty. He emphasized that one of the most effective ways to capitalize on this shift is by focusing on high-quality stocks, specifically those companies with a minimum of 25 consecutive years of dividend growth that have previously been out of favor. Hyman suggested that while this trend of seeking quality and lower volatility stocks predates the current conflict, such companies are particularly beneficial to hold during times of geopolitical instability.

He elaborated that the turnaround is not solely reflected in stock prices but also in the underlying fundamentals of these companies. Hyman noted that historically, all earnings growth was concentrated in the technology sector and the Nasdaq 100. During that period, dividend growers experienced a slight contraction in year-over-year earnings. However, the gap has now closed, and the trend is poised to reverse. Citing Bloomberg data referenced by ProShares in a recent blog post, Hyman indicated that the market is now approaching parity in terms of earnings growth between dividend stocks and tech stocks.

The ProShares S&P 500 Dividend Aristocrats ETF (NOBL) is an example of an exchange-traded fund that provides exposure to large-cap U.S. stocks with substantial dividend payouts. Its top three holdings include Chevron (CVX), Exxon Mobil (XOM), and Target (TGT).

ETF experts generally concur that the outlook for dividend stocks has improved across the broader market. Todd Rosenbluth, head of research at VettaFi, commented to CNBC that companies in sectors such as financials, healthcare, and industrials, which often feature dividend growth, are continuing to experience increased growth. He explained that a long history of dividend increases is typically indicative of consistent cash flow and disciplined management, characteristics that have not always kept pace with the rapid profit expansion seen in the technology sector. However, strong operational performance and improving margins have bolstered profits for many dividend-paying companies in other sectors. As these earnings rise, these companies are not only increasing their dividends but also strengthening their balance sheets.

Meanwhile, technology stocks are facing elevated expectations following several years of strong gains. Furthermore, significant investments in artificial intelligence (AI) infrastructure by tech firms are placing a strain on their balance sheets and cash flow. In contrast, dividend-paying companies outside the tech sector often trade at more moderate valuations. As their earnings growth accelerates, investors may increasingly perceive them as offering a dual benefit of stability and potential for expansion.

Naturally, the current geopolitical climate, particularly the potential for sustained oil prices above $100 per barrel and a prolonged closure of the Strait of Hormuz, could significantly impact the broader economy. Such events could lead to widespread price increases in a supply-constrained economy and potentially trigger a global recession, presenting uncertainties for all stock investors. Even dividend stocks and ETFs like the ProShares NOBL ETF have experienced recent market headwinds, declining 5% in the past month, though they remain up nearly 8% over the past year.

Hyman advised against capitulation during this period, suggesting instead a strategic adjustment of investment portfolios to focus more intently on quality companies. He expressed confidence in dividend growers, stating, "We love our dividend growers." He also referenced historical data from previous prolonged Gulf Wars, noting that stock markets generally experienced an upward trend in the six to 12 months following initial pullbacks, with gains reaching as high as 25-30%. Hyman pointed out that historical patterns suggest market rebounds are a recurring phenomenon.

Furthermore, Hyman highlighted the sustained outperformance of dividend stocks, stating that this trend possesses "some durability." He emphasized that these stocks are currently playing an increasingly crucial role in market stability. "In addition to the durable outperformance opportunity from the dividend growers, the other thing that is very important is that it has kept overall S&P 500 fundamentals stable," Hyman remarked. He concluded that dividend stocks are now effectively "filling the gap" as mega-cap tech earnings growth moderates, which he interprets as a signal of a potential "soft landing" for the economy.

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