It’s The Year of the Dividend Stock

Big Tech is still grabbing the headlines but smart money has moved on.

Thank you for reading Dividends with Roger Conrad! 2025 is shaping up as a year of deadly uncertainty for the S&P 500—and the tens of trillions of dollars in ETFs and passive investing products that track it.

But opportunities abound for the high dividend stocks in my Dividends Premium model portfolio. One example: Long-time laggard CVS Health Corp (NYSE: CVS) is already up almost 50 percent.

Interested in being on the ride side of the biggest trend this year? Then check us out.

My Dividends Premium service features our managed portfolio of stocks like resurgent CVS. And you’ll receive Dividends Premium REITs as well as 24-7 access to the Dividends Roundtable forum I host on Discord. Here’s to making the most of these interesting times!—RC

Maybe it’s premature to declare the era of Big Tech stock market dominance over. That was certainly the case in April and again August of last year. Despite steep declines in what were still very high priced stocks, investors nonetheless bought the dips.

We’ll see pretty soon if Big Tech can pull off a hat trick. So far this year, the Tech Sector SPDR ETF (XLK) is lower by -3%. And its second largest holding NVIDIA Corp (NSDQ: NVDA)—the poster child for the artificial intelligence revolution—is down -7%.

Those are hardly catastrophic declines so far. But the four biggest technology subgroups are a combined 35% of the S&P 500 index. And with three of those underwater, it’s pretty easy to see why the premier benchmark index is having trouble making money now.

In contrast, Oil and Gas, Utilities, Mining Stocks and selected REITs are all up big year to date. But combined they’re still only about 5% of the index. No matter how well they do, they won’t help an S&P 500 weighed down by Big Tech. And that’s very bad news for S&P 500 ETF investors, which basically means everyone who owns stocks passively.

I’m not the first to say the current environment has all the makings of a lost decade for the S&P 500. And with more money passively invested than actively managed in the stock market, that means a lot of losses.

But it doesn’t have to be that way for anyone. All that’s really required is to take control of your wealth.

Step one is pulling your money out of packaged products that track the S&P 500 and other big cap indexes, especially the so-called “Target” funds peddled by Wall Street mega-firms like Vanguard.

It’s frankly far too charitable to call Target funds’ investing by calendar approach a “strategy.” Just ask anyone who held a fund with an early-to-mid 2020s target date—and was slaughtered by the bond market meltdown of 2022-23: Shifting from stocks to bonds does not mean you’re automatically reducing risk.

Step two is to starting picking your own investments, with stocks at the top of the list.

There’s more than one way to go about this. Some may want to start out by picking a good actively managed mutual fund. I have absolutely no problem with that. You could also work with a stockbroker you trust and/or subscribe to an investment advisory for information.

But whatever you do, now is the time to act. Mainly, the stock market is entering a powerful transition that will reward the very stocks your S&P 500 ETF doesn’t own in quantity.

The index will adjust eventually. Currently under-represented stocks that rally will become a bigger piece of the S&P 500 and related ETFs. And the now over-represented sectors like Big Tech will see their share shrink as they under perform.

That’s pretty much what happened in Tech Wreck of the ‘00s, following the historic Big Tech boom of the 1990s. But the S&P 500 also made little if any headway that decade. And investors who made the jump to the decade’s winners kept growing their wealth.

The best performing stocks in the ‘00s were by and large what Wall Street calls “high quality growth and value.” And those paying dividends got an extra lift from President Bush’s tax reform, which cut the tax rate on distributions.

Market history doesn’t really ever repeat. But to paraphrase one of my favorite Mark Twain quotations “it often rhymes.”

In this case, the early 2020s are looking a lot like the early ‘00s. And that means every investor should at least start looking at stocks of high quality companies that pay dividends.

What do I mean by high quality? Basically there are five elements:

· A sustainable dividend policy.

· Business revenue streams that have proven reliable, preferably in every economic environment.

· Demonstrated ability to manage regulatory and legal issues that affect the core business.

· A strong and resilient balance sheet capable of keeping investment plans on track in every economic environment.

· Solid operating efficiency that’s consistently ranked at the top of the company’s industry.

I’ve found that companies excelling in one of these elements will almost always match up well on all five. Conversely, a company that fails on one count will usually be worth avoiding on the grounds of floundering on all five.

Also, how a company stacks up on these five elements is hardly set in stone. Investors should view all underlying businesses as being constantly in flux. And our job is to use best available information to determine if they’re getting stronger or weaker.

If they’re getting stronger, we want to own them. If they’re heading the other direction, we want to move on.

The now close-to-winding up Q4 earnings reports and guidance updates have been an ideal time to assess things. And that’s been especially true for companies operating in industries where investors expect impact from Trump Administration policy shifts—which quite honestly is most companies at this point.

I titled my January 19 Substack post “Resolution 2025: Keep Your Politics Off Your Portfolio.” And if anything, I’m more convinced than ever that the biggest mistake investors will make in 2025 is wrongly assuming actions by politicians will have a particular investment result.

Bets against oil and gas, renewable energy and pharmacy were all popular a few months ago. And they’ve already begun to unravel badly.

Each case had a plausible rationale. Oil and gas were supposed to be hit by plunging energy prices, as “drill baby drill” policies induced over production. The Trump Administration’s hostility to wind is well known. And RFK Jr’s ascension as America’s top health official combined with cuts in government spending are potential headwinds for healthcare and pharmaceutical companies.

Yet, energy (including wind and solar) is among the top performing sectors year to date. And shares of leading pharmacy/health insurance/health care company CVS Health Corp (NYSE: CVS) are up almost 50 percent.

Clearly, there are other factors affecting shareholder returns that are more important than politics.

One of them is companies are matching up well on the five elements I highlighted above. And that was definitely true for CVS, which has surprised many by turning the corner faster than expected on a “transition year” in 2024.

But the more important catalyst is simply the great rotation is picking up steam: Smart money is flowing to high quality dividend paying stocks that are still under represented in the S&P 500—and it’s coming out of very high priced and vulnerable Big Tech.

This is the year of the high quality dividend stock. And it could very well be the first of many!