Dividend Growth Over Dividend Yield

How Madison Dividend Value ETF invests in quality and growth.

Authored by Drew Justman, Dividend Income & Covered Call Portfolio Manager

At the end of the first quarter of 2026, there were 20 stocks in the S&P 500 with dividend yields greater than 5.3% (or 4x the index). Of these 20 companies, 6 had dividend payout ratios (dividend divided by net income) above 70%, including 3 with payout ratios above 80%. When such a high percentage of a company’s earnings goes to paying its dividend, any risks to revenue, earnings, and cash flow put that dividend in jeopardy. We think economic and industry-specific uncertainty surrounding geopolitical trade policies has increased risks to high dividend payout companies in recent months. For resiliency in difficult markets, we think investors should consider dividend growth and high quality characteristics over dividend yield alone.

Payout ratio, as mentioned above, is one metric we look at when assessing a company’s ability to continue to increase dividends into the future. We like to own stocks with payout ratios in the 30%-50% range. This sweet spot provides a cushion for when revenues, earnings, and cash flow are pressured, while allowing for future dividend growth to outpace inflation when these metrics recover.

For Madison’s Dividend Value ETF (NYSE: DIVL), we first screen for above-average dividend stocks that have a dividend yield at least 1.1x the S&P 500. We track this relative yield over time, and if a stock has a high dividend yield relative to its history, it may suggest the market is worried about the company’s near-term outlook or ability to continue paying its dividend. This could be an opportunity for us to invest. Next, we analyze a company’s business model, balance sheet, and cash flow profile to assess its ability to continue paying its dividend with the possibility of consistent dividend increases in the future. Ideally, a company would keep raising its dividend in line with earnings growth. We want to find stocks that have above-average dividend yields and potential dividend increases in the future, while avoiding stocks that may have high dividend yields but face secular challenges and limited ability to raise their dividends.

A great example of a high payout ratio stock with questionable dividend sustainability is Dow Inc. (DOW). In January 2025, DOW announced a quarterly dividend of $0.70. At the time, the projected annual dividend of $2.80 was roughly a 7.8% dividend yield, more than 4.5x the S&P 500 yield. However, if you look past the headlines and analyze its past year’s cash flow statements, you’ll see that all of DOW’s free cash flow was used to pay the dividend. Longer-term, DOW hadn’t generated earnings per share to cover the dividend. In 2023 and 2024, DOW had earnings per share of $0.82 and $1.57, respectively, compared to annual dividend payments per share of $2.80 both years. This dividend rate proved unsustainable as just two quarters later, in July 2025, the company cut its dividend by 50% and its stock price fell dramatically. We believe this is a good example of how high dividend payout ratios can be leading indicators of future dividend cuts.

If companies are unable to earn their dividends consistently, we don’t view the dividends as sustainable sources of income, and we avoid investing in that company.

About Madison Dividend Value ETF

• High-conviction portfolio of 30-50 above-average dividend paying stocks.
• Over the past year, portfolio holdings have increased their dividends by 6% on average¹.
• High-quality portfolio reflected in strong balance sheets. Using Standard & Poor’s credit ratings to assess financial strength, 94% of fund holdings are rated A- or better¹.

Disclosures

¹ Data as of 6/30/2026

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