Dividend Growth Investing Is Breaking

Summary

• A long-trusted strategy is suddenly breaking down in ways few anticipated.
• Yields are rising, but the real danger is lurking beneath the surface.
• The safest dividend names may no longer be what investors think.

Dividend growth investors tend to think long term, and for years, multinational dividend growth stocks like PepsiCo (PEP and Procter & Gamble (PG felt like buy, throw away the key, and hold forever typeinvestments.

In fact, a simplified approach to dividend investing could simply be to just buy the Schwab U.S. Dividend Equity ETF (SCHD and dollar-cost-average into it over time and expect to continually generate strong dividend growth and attractive total returns over time. In fact, this approach has worked really well from a dividend growth perspective, and for a number of years, the total returns were pretty competitive compared to the S&P 500’s (SPY :

However, the last couple of years have been quite disappointing for these stocks, as evidenced by SCHD’s abysmal underperformance:

The consumer goods sector (VDC has been particularly weak recently and has played a significant role in dragging down the broader dividend growth sector, as nearly 28% of the Dividend Aristocrats (NOBL and nearly 29% of SCHD are allocated to this sector:

In this article, we will look at why this is and what the implications are for dividend growth investors moving forward.

Why Dividend Growth Stocks Are Struggling

The biggest problem facing dividend growth stocks today is the fact that they are facing considerable structural pressure on two sides. On the one hand, they are facing tariff-related pressures, while on the other side, they are still battling persistent inflation and a weakening consumer.

As a result, they can no longer pass on all of their higher costs to consumers, as they have previously, and therefore, the pricing power that traditionally funded their strong dividend growth and drove their strong stock price appreciation is now declining.

As margins are compressing, free cash flows are under pressure. Ultimately, their dividend growth is slowing, and in some cases, such as with Conagra Brands (CAG , their dividend growth has been halted altogether, and their stock has plunged.

There are other companies like United Parcel Service (UPS that have also seen their dividend come under threat and their stock price experience significant pressure due to uncertainties fueled by tariffs and trade policy changes, while also dealing with higher input costs as well.

Thus, what were previously steady-eddy, very safe dividend growth machines are now becoming increasingly risky.

Tariffs, Inflation, and a Weaker Consumer

Tariffs have been a somewhat surprising hit over the past year, because previously there was a general assumption that we were in a globalized economy where tariffs were likely to remain low and only would be placed on very niche and select items as tools for protecting very specific national security essential industries and/or to effectively sanction a certain country.

However, the Trump administration’s approach to tariffs has been much broader and more sweeping in nature, and as a result, it has forced many companies to absorb at least some of the costs of these tariffs to retain market share and keep flagging consumer demand from completely vanishing.

This is especially important given that debt levels in United States households are at record levels, with credit card debt in particular reaching troublesome levels, and consumer sentiment at a very weak level as well.

In fact, it is only the wealthiest consumers who are propping up consumer demand, which means that the broad-based demand that many of these multinational corporations depend on to drive strong volumes in their sales is weakening.

Moreover, many companies have already reported the impacts that tariffs are having on their bottom lines. For example, PG has a projected $1 billion hit from tariff-related costs for fiscal 2026. Nike (NKE is projecting a $1.5 billion hit. 3M (MMM and Mattel (MAT are each estimating around a $100 million hit from direct tariff costs. These numbers demonstrate that these companies are already factoring these costs in and that is ultimately flowing through to taking a bite out of their expected bottom lines, thereby leaving them less money to ultimately pass on to shareholders via dividend growth.

This is particularly the case given that the aforementioned weakness in the consumer means that these companies have limited capacity to pass on these increased costs to the consumer via higher prices. Another cause for concern is how much management has been obsessing over the impact of tariffs. This is evidenced in the fact that the mention of tariffs on earnings calls has surged 190%, while the mention of hiring freezes on earnings calls has jumped 286%. General references to “uncertainty” rose by 49%, especially in the industrial and consumer sectors. This reflects management teams that are becoming increasingly cautious and therefore are likely to behave more conservatively, including reducing buybacks and dividend increases in an attempt to conserve cash and preserve their financial positioning through a period of prolonged uncertainty and potential economic weakness. While this study was done on Q1 earnings calls in the wake of the release of Trump’s “Liberation Day” tariffs, such sentiment impacted company actions over the course of the remainder of 2025 and contributed to their underperformance in the stock market. Additionally, some of this uncertainty still persists today.

Why Dividend Growth is Slowing

Additionally, inflation is providing a headwind for these companies because not only is it increasing some of their input costs through higher labor, materials, and production inputs, but also it has stretched consumers thin by giving them less purchasing power, which in turn is driving them towards lower-cost private label products and discount retailers. Therefore, brand loyalty is beginning to crack under pricing pressure.

This produces a vicious cycle where tariffs raise input costs as well as inflation, and then inflation and tariffs also limit pricing power due to a stretched consumer. This, in turn, leads to compressing margins, which then leads to slower dividend growth, and ultimately stock price valuations reprice lower as a result of the slower growth.

Therefore, just because a stock’s yield is rising, for example, as we see with Clorox (CLX , PEP, and CAG, it does not necessarily mean that the company is that much better of a buy, because you also need to look at the underlying dividend growth outlook for the company. If it is declining substantially, then the higher yield being demanded from the market may be justified.

Investor Takeaway

Ultimately, what this means for me is that I am not buying any high-yielding dividend growth stock simply because it has a strong history and today offers a high yield. Instead, I’m primarily focusing on the dividend growth names that are somewhat insulated from these aforementioned headwinds yet still offer a very attractive valuation.

That’s why I like a lot of infrastructure (UTF names right now, like Energy Transfer (ET , which also had a pretty abysmal 2025 in terms of its unit price performance, yet its underlying fundamentals are quite strong, its distribution growth outlook remains unhindered, and it is not suffering from these aforementioned headwinds.

Additionally, I like certain REIT (VNQ opportunities that are also not very exposed to this sort of environment. For example, Rayonier (RYN is a timberland REIT that has a dividend yield of over 5%, and, if anything, benefits from the tariff since its lumber supply is in the United States.

That being said, I am still certainly looking at some of these consumer staples dividend growth stalwarts, and I have several on my watch list at the moment, including CAG and UPS. For more on the CAG opportunity, check out my recent analysis here.

If their underlying fundamentals show signs of improvement, and the market does not seem to fully appreciate that, and/or their stocks get cheap enough at a certain point, I will pull the trigger on them.

But for now, I’m steering clear in favor of other very attractive opportunities that have much more promising underlying fundamentals in the current environment in my portfolios at High Yield Investor.

Illustration by Space Stock on Unsplash