Are dividend-growth stocks the secret to a successful retirement plan?

After the war in Iran triggered the closure of the Strait of Hormuz at the end of February, blocking tanker traffic and pushing up global oil prices, stocks plummeted. But in April, with no real progress toward a sustainable re-opening, the S&P 500 hit new highs.

Why did the index do so well in April after hitting a 52-week low March 30? Likely, not just from faith that the Iran conflict would soon be resolved.

A more impactful reason was that, after an initial market over-reaction to rising oil prices, existing positives resumed their relative impacts. Those factors, likely to continue driving market performance nicely for the next 12 months, include:

• Strong current and projected earnings (the lifeblood of public companies). In the first quarter of this year, more S&P 500 companies issued positive earnings guidance and fewer, negative guidance, than in any quarter in the last five years.
• Continued high demand for copper. The metal is known as Dr. Copper for its reliability as an indicator of near-term economic growth, as it’s used in so many ways — cars, construction, technology and consumer electronics.
• Positive signals from two key gauges. In a contrarian scenario of reverse logic, current negative consumer sentiment is being interpreted by institutional investors as indicating a good time to buy stocks. “Buy” signals are also coming from readings of a gauge known as the fear-greed index.

In the first quarter of this year, the non-tech market sectors with the most companies issuing positive EPS guidance in 10 years were consumer discretionary, industrials and materials, indicating likely brisk growth for the rest of 2026 and beyond.

Dividend growers

Some stocks in these and other market sectors consistently pay growing dividends — a trait that’s highly advantageous for investors approaching or in retirement. Rising dividend income counters inflation, the nemesis of retirement resources.

Consistent dividend payers tend to be mature companies that, unlike younger ones, don’t need to put as much money back into their enterprises, so they pay it out to shareholders.

The wherewithal of companies to pay increasing dividends usually reflects strong financial positions, making these companies good investments irrespective of these payouts. Dividends are paid at set intervals, at the discretion of a company’s board of directors, with the specific amount usually depending on how well the company’s doing at the time.

Some of the most reliable dividends are paid by a group of stocks known as Dividend Aristocrats, large companies that have raised dividends annually for at least 25 consecutive years.

Now may be a particularly advantageous time to buy these and many other habitual dividend-paying stocks because they currently have low price/earnings ratios relative to their broader category, the S&P 500 index of large-company stocks. A low P/E ratio means investors get a stock’s earnings for a relatively low price.

In recent months, the aristocrats’ average P/E has been about 80% of the S&P 500’s. Historically, whenever they’ve had an average P/E less than 90% of the index’s, their forward (projected) three- and five-year returns have outperformed it, and actual performance has pretty much followed suit.

The 69 aristocrats are listed here, ranked according to their dividend yields. Though all of these stocks’ dividends are among the market’s most reliable, some may be more reliable than others, so this list also gives an assessment of the relative security of their payouts. It doesn’t cite share-price performance, so investors need to research that themselves, perhaps using their brokerage’s website tools.

Dividend stock ETFs

The indefatigable American fund industry has created a myriad of exchange-traded funds that track dividend stocks.

Some of these ETFs are pretty basic, limiting holdings to those paying or expected to pay the most consistent or consistently rising dividends. Holdings often include Dividend Aristocrats and Dividend Achievers, stocks that have increased their dividends every year for 10 years.

Other ETFs seek to increase returns by tracking dividend stocks with particular characteristics or by using options strategies to leverage market volatility.

In selecting funds, individual investors should keep their eyes on the prize of total returns, share price performance and dividends combined, and avoid distraction from the shiny object of ultra-high dividends. Though such funds can be useful in some strategies, their lofty payouts tend to constrain growth.

And a whopper of a dividend loses its sex appeal if a stock’s price goes too far south. Significant share price declines jeopardize dividends because troubled companies tend to cut payouts. Over time, these downdrafts can defeat the purpose of owning stocks in the first place — to eventually sell appreciated shares for gains far greater than those generated by dividends.

Here’s a list of dividend-grower stock ETFs. Among them are some attractive straightforward domestic large-cap funds with good total returns, including:

Invesco S&P 500 High Dividend Growers (DIVG). Growth over the last 12 months, 20.3% and this year, 9.8%. Annual dividend yield over the past 12 months, 3.08%.

VanEck Durable High Dividend (DURA). Growth over 12 months: 19.6%. This year: 11.9%. Annual dividend yield: 3.24%.

First Trust S&P 500 Diversified Dividend Aristocrats (KNGZ). Twelve-month growth: 26.3%. This year: 8.7%. Annual dividend yield: 2.7%.

iShares Core Dividend Growth (DGRO). Twelve-month growth: 22.1%. This year: 5.8%. Annual dividend yield: 2.1%.

In recent months, mid-cap and small-cap stocks in some sectors — energy, industrials, materials, real estate and utilities — have been outperforming their large-cap counterparts. So funds tracking small-cap and mid-cap dividend-payers may be worth a look for investors seeking to build a varied portfolio of funds. Small- and mid-cap dividend payers are the focus of First Trust SMid Rising Dividend Achievers (SDVY).

Superior to bonds

The reliability of increasing dividends and the historical likelihood of growth makes dividend stocks a superior alternative to bonds for long-term holdings, especially for older investors.

If investors hold bonds to maturity, they get back their principle, but it’s whittled down by inflation. And for the term of the bond, they get the same dreary, low interest every year; they never get a raise. But they can from stocks that pay rising dividends, along with likely long-term appreciation that bonds can’t provide.

Despite these drawbacks, traditional tenets of financial planning call for retirees’ portfolios to be heavily weighted in bonds.

This has long been a misguided recommendation, especially for the wealthy, and up-to-date longevity studies bolster the case against it. The thrust of these studies contradicts the belief that most retirees should increasingly weight their portfolios more heavily in bonds as they get older.

The studies indicate that most retirees are likely to live much longer than they probably assume, so they’ll need greater retirement resources than they think.

Market history shows that the superior long-term returns of diversified stock holdings are far more likely to fund these unexpected years of living than bond-heavy portfolios.

Dividend stocks can help less well-off retirees avoid running out of money and the well-heeled maintain the comfortable retirement lifestyles that they’d envisioned, funding travel and other luxury pursuits — with more leftover for legacies.

That’s because reliable dividend-paying stocks present the best of both worlds: income and growth.

Dave Sheaff Gilreath, CFP,® is a Partner Advisor Allworth Financial LP, an investment advisory firm registered with the SEC. Investments mentioned in this article may be held by Allworth Financial, affiliates or related persons.