Dividend growth stocks have historically delivered higher average returns with less volatility than the broader market since 1960. Learn how a dividend growth ETF can help reduce risk without sacrificing long-term performance.
As market volatility increases, investors are seeking strategies to protect their portfolios from sharp fluctuations while maintaining long-term growth potential. Dividend growth stocks-companies that consistently raise their dividends-have demonstrated a history of providing higher returns with lower risk compared to the broader market, particularly during uncertain periods.
Recent market turbulence has been driven by several factors: the 10-year Treasury yield reaching its highest level since 2007, oil prices surpassing $100 per barrel, persistent inflation, and warnings from AI companies about potential slowdowns in spending. These developments have contributed to investor uncertainty about the near-term outlook for equities. However, historical data indicates that dividend growth stocks can serve as a practical buffer against such headwinds. According to a Reuters financial review, the 10-year U.S. Treasury yield surged to 5.041% on September 15, 2026, its highest level since July 2007, before closing near 5.00%.
In September 2026, Brent crude oil prices remained above $105 per barrel following a series of Houthi attacks on Saudi Arabia, raising concerns about further inflationary pressures.
Research from Hartford Funds and Ned Davis Research shows that since 1960, reinvested dividends and compounding have accounted for 85% of the S&P 500's cumulative total return. Not all dividend strategies are alike. Companies that regularly grow or initiate dividends have achieved an average annual total return of 10.22%, with a beta of 0.89 and a standard deviation of 15.97%. In contrast, companies that cut or eliminate dividends have produced negative average returns and significantly higher volatility. Even when compared to the equal-weight S&P 500 Index, dividend growers have outperformed while exposing investors to less risk.
For investors, beta measures how much a stock or fund moves relative to the market, while standard deviation reflects the variability of returns. Lower values in both metrics indicate less volatility. The data suggests that dividend growth stocks have historically offered a rare combination: higher returns and lower risk. The same Hartford/Ned Davis dataset found that companies which cut or eliminated dividends experienced negative average returns and greater volatility, underscoring the defensive characteristics of dividend growth strategies.
Reuters reported that the surge in Treasury yields above 5% was linked to a sharp rise in oil prices and heightened expectations of a more hawkish Federal Reserve policy. The bond selloff in mid-September 2026 was driven by renewed inflation fears and the prospect of prolonged higher interest rates, prompting a rotation into more defensive market segments.
Constructing a portfolio of individual dividend growth stocks can be time-intensive and requires ongoing oversight. Exchange-traded funds (ETFs) focused on dividend growth provide a more streamlined solution. The iShares Core Dividend Growth ETF (DGRO) is one such fund, tracking the Morningstar U.S. Dividend Growth Index. To be included, companies must have at least five consecutive years of dividend growth, a positive consensus earnings growth forecast, a payout ratio below 75%, and must not be among the top 10% by yield. These criteria are designed to exclude companies with unsustainable dividends or weak fundamentals.
DGRO currently holds 390 companies that meet these standards. Since its inception in 2014, the fund has delivered a 12.2% annualized total return, with double-digit returns over the past 1-, 3-, 5-, and 10-year periods. Its three-year beta is 0.67, and its standard deviation is 10.4%, both lower than the broader market. While past performance does not guarantee future results, the fund's methodology has historically produced above-average returns with reduced volatility.
Comparing Strategies and Risks
Dividend growth investing is not immune to market downturns, but it has historically helped cushion the effects of volatility. Unlike high-yield strategies that may pursue unsustainable payouts, dividend growth funds focus on companies with a demonstrated ability to increase dividends over time. This approach can help investors avoid the risks associated with dividend cuts, which have been linked to negative returns and higher volatility.
For those evaluating different income strategies, it is notable that dividend payers who do not grow their payouts have lagged behind dividend growers in both return and risk metrics. Non-payers and companies that cut or eliminate dividends have performed even worse. As reported earlier, outsized dividend increases are uncommon, but steady growth is often a more reliable indicator of financial health.
Understanding Volatility and Compounding
Market volatility can undermine investor confidence and lead to poor timing decisions, such as selling during downturns. Dividend growth stocks may help offset this risk by providing a stream of rising income, which can be reinvested to benefit from compounding. Over decades, reinvested dividends have been a major contributor to total returns for U.S. stocks. For investors seeking a balance between growth and stability, focusing on dividend growth-especially through a diversified ETF-can be an effective way to reduce portfolio fluctuations without sacrificing long-term performance.
Dividend growth investing is based on the principle that companies able to raise their payouts year after year are often financially sound, disciplined, and less likely to take on excessive risk. This discipline can lead to more resilient earnings and a steadier experience for shareholders. While no strategy is without risk and all investments carry the potential for loss, historical evidence suggests that dividend growth stocks merit consideration for investors aiming to navigate uncertain markets.
