Dividend growth investing is the practice of owning companies that pay a dividend and raise it every year, then reinvesting those dividends to compound the position over time. It is unglamorous. It is slow. It is the strategy your grandfather used and the strategy a lot of serious investors quietly returned to in 2025 when the market got choppy. In 2026, with the 10 year Treasury at 4.39 percent and the S&P 500 trading at a price to earnings ratio of 24.8, the math on dividend growth has become competitive again.
The strategy goes back to the work of Jeremy Siegel and others who showed that across 80 years of US market history, dividend reinvestment has accounted for roughly 40 percent of total return on the S&P 500. Companies that consistently raise their dividend tend to be more profitable, less leveraged, and more disciplined with capital than the broad market. The S&P 500 Dividend Aristocrats Index, which tracks companies that have raised their dividend for at least 25 consecutive years, has outperformed the S&P 500 by 1.2 percent annually since 1990 with lower volatility. That is the case the strategy has always made.
The 2026 version of the strategy is built around three vehicles. The Schwab US Dividend Equity ETF, ticker SCHD, is the cheapest and most popular. It charges 0.06 percent annually, holds 100 large dividend-paying US companies, and yields about 3.6 percent. The Vanguard Dividend Appreciation ETF, ticker VIG, focuses on companies with at least 10 years of dividend growth and yields 1.9 percent with stronger price appreciation. The Vanguard High Dividend Yield ETF, ticker VYM, yields 2.9 percent with broader exposure to value sectors.
For investors who prefer to pick individual stocks, the dividend growth approach focuses on companies with payout ratios below 60 percent, dividend growth rates above 5 percent annually, and balance sheets strong enough to sustain raises through a recession. Names that have been on the list for decades include Johnson and Johnson, Coca-Cola, Procter and Gamble, Lowe's, McDonald's, and Microsoft. Microsoft is a recent entrant on most lists since it started its dividend growth track in the early 2000s and has compounded the payout at over 10 percent annually for the last decade.
The math gets interesting when you look at yield on cost. If you bought $10,000 of a stock yielding 2 percent today and the company raises the dividend 8 percent a year for 20 years, your yield on the original cost basis grows to roughly 9.3 percent. The actual current yield on the stock might still be 2 percent because the price has also appreciated, but you are receiving 9.3 percent of your original investment as cash every year. That is the compounding the strategy is built around.
The criticism of dividend growth investing is that dividends are tax inefficient compared to buybacks. In a taxable account, qualified dividends are taxed at 15 to 23.8 percent annually whether you reinvest or not. Buybacks are tax-free until the shareholder sells. For high earners in taxable accounts, a buyback-heavy company can deliver more after-tax return than a dividend payer with the same total return. The fix is to hold dividend growth positions in IRAs and Roth accounts where the tax friction disappears.
Tennessee residents have an additional benefit. Tennessee has no state income tax on dividends since 2021, which means dividend income is taxed only at the federal level. For investors in California or New York, state tax adds another 9 to 13 percent to dividend bills. In Nashville, the strategy is materially more attractive than in higher tax states.
The drawdown behavior is what makes dividend growth psychologically sustainable. In the 2022 bear market, the S&P 500 dropped 25 percent. SCHD dropped 13 percent. The Aristocrats Index dropped 14 percent. The lower drawdown comes from the sector mix, which is heavy in consumer staples, healthcare, and utilities, all of which tend to be more defensive. Investors who can hold their position through a bear market without panic selling generate better long-term returns than investors who chase the next theme. Dividend growth attracts the kind of investor who can hold.
The criticism that dividend stocks underperform during long bull markets is valid. The 2010 to 2021 stretch was dominated by growth stocks, and SCHD lagged the S&P 500 by 2 to 3 percent annually during that window. The right framing is not that dividend growth always wins. It is that dividend growth wins on a different cycle than growth investing, and the combination of the two reduces overall portfolio volatility.
A 2026 portfolio for an investor who wants both worlds might be 60 percent in a total market index like VTI, 30 percent in a dividend growth fund like SCHD or VIG, and 10 percent in international exposure through VXUS. The dividend slice provides cash flow and lower volatility. The total market slice provides growth exposure. The combination has historically produced returns within 0.5 percent of pure US total market with lower drawdowns and faster recovery times.
Dividend growth investing is not exciting. It is also not what gets discussed at dinner parties. It is what a lot of quiet investors have been doing for 50 years, and in 2026 the strategy is working again.
