It won’t come as any surprise to anyone who has been watching the market lately that a lot of the current growth streak is based on the incredible earnings in the tech industry. Names like NVIDIA (NASDAQ:NVDA) are leading the way, and while an “AI bubble” may or may not be real, it’s hard to ignore just how much growth tech has had as of late.
There is no question that the last few years have belonged entirely to the mega-cap tech sector, which is making money hand over fist. This is the hard part about calling out a potential bubble, as FAANG profits are all but validating their sky-high valuations. Even if they have helped push the market through volatility and inflation, the next phase of the cycle could be in sight.
This is why dividend-growth stocks are having a moment in the sun, and while they won’t grab headlines like Apple (NASDAQ:AAPL) or Meta (NASDAQ:META), they absolutely can be a great way to offset potential risk with mega-cap stocks.
The Value Reset Is Coming
You can’t possibly dispute that the tech sector has delivered extraordinary gains, but with that success comes elevated valuations. Many mega-cap names now trade a price-to-earnings (P/E) multiples that assume years of almost flawless growth. Now, none of this is to say that the tech sector’s good fortune is “over,” but it does mean that future returns are not guaranteed to match what we have seen over the last 18 months.
On the other hand, you have many dividend-paying sectors that have been overlooked and underpriced. Utilities, financials, and consumer staples are just a few of the sectors trading at far more attractive valuations for investors. You can’t argue that these sectors have participated in the same kind of rallies as tech, but a leadership change is overdue.
After a long run of tech dominance, the next rotation may favor high-quality companies with strong free cash flow and consistent payouts.
Stability Matters More Than Speed
For those companies in the Dividend Aristocrats index, the idea that they have increased their payouts consecutively, every year, for the last 25-50 years isn’t just a happy accident. No, these companies are increasing dividend payouts because they are durable, often recession-resistant, and built on recurring cash flows.
This financial resilience can and will act as a stabilizer when volatility rises, and even in a bull market, investors crave predictability, and dividend growers offer this with reliable cash returns that aren’t dependent on daily market swings. Tech stocks, on the other hand, are often found to struggle during rate shifts, earnings downgrades, or just policy uncertainty.
Compounding Will Quietly Outperform Hype
Here’s a secret that every investor should know and that is that reinvested dividends will continue to remain one of the most appreciated ways to invest. For many stocks, especially outside of tech, dividends can account for as much as 40% of long-term total returns. Now, consider reinvesting those payouts, and every year of growth builds on the last.
Tech can and has shown to soar on strong momentum, but this is limited, whereas dividend portfolios quietly compound in the background, even when prices need a break.
In addition to these ideas, considering that during a moderate bull market, the steady compounding from dividend growers can push them ahead on a risk-adjusted basis. Compared to tech, where growth comes from price appreciation, dividends are going to generate regular cash flow regardless of which way the market is moving.
Take the JP Morgan Equity Premium Income ETF (NYSE:JEPI) for example, which is currently delivering an 8.38% dividend yield and $4.72 annual dividend. It’s hard to argue that the math here is that JEPI is also up 5.83% on the year, and that even if technology falters, it has healthcare, financial services, and industrial positions to help maintain the right balance. If you compound your dividends, you’re only going to increase exactly how much you are earning every month, which means you’re making money even if the market isn’t.
Investors Want (and deserve) Balance
After years of having to chase growth, many investors, retail or otherwise, are looking to reduce their concentration risk. Portfolios have been overloaded with tech lately because of the strong returns, but they are now equally vulnerable to market swings and, most importantly, AI speculation.
Dividend-growth stocks are there to provide a natural counterbalance that can bring lower volatility and smoother returns. Even if tech remains a core part of a portfolio, and it should, a growing number of investors are going to want to add more exposure to companies that return cash every month or quarter instead of relying just on share price momentum.
With baby boomers shifting into retirement at historic levels, younger investors are seeing the writing on the wall and embracing passive income strategies, like dividend earnings.
The Bigger Picture
None of this is to say that tech is going away, on the contrary, but no one should expect divided payers to replace the innovation economy. As market leadership changes, the conditions forming today look very favorable to the companies that have been quietly increasing their payouts year after year. Ultimately, it’s more of a when, not if, these valuations in tech reset or overall economic growth slows, or the AI-bubble really does burst, dividend growth is going to take center stage.
For investors who long to build wealth with a long-term mindset, the next market is going to reward stability, and cash flow is every bit as important as the big tech names that defined the last big earnings period.