Ivanna Hampton: Welcome to Investing Insights. I’m your host, Ivanna Hampton. There’s just something about dividends. The popular investing strategy attracts retirees and other investors who need regular cash payouts, as well as those who like the tangible return dividends represent. Even if they are reinvesting those distributions back into their portfolio. But what are the trade-offs, and are they worth it? It depends on who you ask. From the pages of the Q2 2026 issue of Morningstar Magazine, you’re going to see this a lot in this issue. Several specialists argue against chasing higher yield. Instead, they encourage investors to balance dividends and total return. Joining me to discuss the magazine spotlight is Jerry Kerns, who’s the editor in chief. Welcome to Investing Insights, Jerry.
Jerry Kerns: It’s an honor to be here. Thank you.
Hampton: Glad you feel that way. Tell us: What is dividend investing, and what are the strong reasons behind its appeal?
Kerns: Well, it’s very appealing for investors as we know. It’s one of the hot topics at Morningstar. Basically, dividend investing is a strategy where your primary goal is to earn income from your investments on a regular basis, monthly, quarterly, or yearly. Obviously, that has a lot of appeal for investors, especially retirees, because first of all, it’s a regular income stream that they know they’re going to get. It’s something they can plan for. They know what the future holds. It’s a pretty regular stream of income. There’s also the factor that it’s kind of real, that it’s actual cash going into your bank account as opposed to a percentage gain, which is basically on paper and kind of a hypothetical, whereas a dividend is cash going into your account. Because of this, it kind of gives investors peace of mind that no matter what the market is doing, I’m going to get that dividend.
Unless a company is under financial distress, if the market goes down 10% one day or up 10% or bounces around as we’ve seen a lot lately, my constant dividend is still going to be there. It gives you peace of mind that you can weather any storm. That leads to kind of the fourth point that, in a way, dividend investing encourages people to invest more. During a turbulent time, we know behaviorally that a lot of people will panic and sell their stocks. Well, a dividend investor won’t do that because they know that their dividend is safe, again, unless there’s something catastrophic happening. Also, we know that investors will want to increase their dividend investments if they want to up what yield they get. One easy way to get more yield or more dividends is to buy more stocks. That’s a win-win over the long term.
Hampton: I’m going to hold up something that I think is so beautiful. It’s the Q2 issue of Morningstar Magazine.
Kerns: Yes. Can we look at that cover just a little bit? That’s by an Italian illustrator. We’re pretty proud of that. I love that cover.
Hampton: It’s beautiful. So, several authors discouraged investors from looking only at dividend yield. Talk about the trade-offs that investors might be making when they’re chasing yield.
Kerns: Yeah. We call this dividend traps, and dividend traps are a big danger, a dangerous part of dividend investing. That’s basically when you are looking only at the yields, going for high yields, but that can lead you to kind of dangerous parts of the market where you’re going to be exposed to companies that are maybe under financial distress, whose fundamentals are declining, and so therefore they have to pay a higher yield to track investors. There are also a lot of esoteric, risky funds that are doing kind of weird strategies with high yields. Once again, that’s kind of risky stuff. Those are kind of traps that they’re meant to entice you in, but in the long run, there might be trouble.
Hampton: You mentioned that high yields may signal that a company’s financial outlook is deteriorating. How does Morningstar identify firms that are likely to cut their dividends?
Kerns: Well, Morningstar strategist Dan Lefkovitz has a piece in the magazine where he addresses this exact question. He says there are three ways that you can kind of tell if a company is in a dicey situation. First of all, look at the payout ratio, which the payout ratio is the percentage of cash a company is paying out relative to their earnings or profits. A triple-digit payout ratio is kind of a red flag. That means that the company is paying more out, a higher level than perhaps their cash on hand that they have. That’s one red flag is a high payout ratio. The second one is to look at the moats, Morningstar’s economic moat measure. Wider-moat firms tend to cut dividends less than no-moat firms, so a moat is an important part of a dividend strategy, we think.
Finally, this is a little bit technical, but it’s what the Morningstar index team uses in their dividend indexes. It’s called distance to default, and that’s kind of a complicated measure that basically attempts to measure how close a company is to bankruptcy. Obviously, the higher distance to default measure relative to their peers, the better it is for dividend investors because they’re less likely to cut their dividend; a high score, a high distance to default means a company is farther away from bankruptcy. Just to recap, a high payout ratio, wide moats, and a high distance to default measure are the way to go.
Hampton: Thank you for recapping. Now, sometimes companies buy back shares instead of, or in addition to, paying out a dividend. Why should investors consider the buyback yield as well as the dividend yield?
Kerns: Share buyback is another part of the total return equation, and it’s called share
We have an example of that in the magazine; there’s a chart. Morningstar has an index called the Morningstar US Dividend and Buyback Index, which captures buybacks, and it has crushed the Morningstar dividend-only index. It’s really a substantial difference. It’s just a way that dividend investors can maybe think about total return and kind of capture more of the growth companies out there.
Hampton: Now, we’re going to focus on dividend-paying stocks that Morningstar equity analysts like. What are they, Jerry?
Kerns: Yeah. Well, I’m going to have to rely on investment specialist, Susan Dziubinski. She just recently highlighted two dividend kings, and these are stocks that have raised their dividends for 50 consecutive years, so it’s pretty impressive. There are examples of dividend kings cutting their dividends. We don’t know what the future holds, but it’s a pretty good bet that these companies are dividend-strong. That would be Pepsi PEP and S&P Global SPGI. They’re both, as she highlights, currently undervalued, and they have wide moats as we discussed earlier. She mentions that both companies have highly rated management teams that focus on dividends and should be able to deliver consistent dividends into the future. Once again, that’s Pepsi and S&P Global.
Hampton: A trio of dividend-focused portfolio managers shared their insights in Morningstar Magazine. What do Morningstar analysts think about their strategies?
Kerns: Well, they love them. Yeah. We hosted a roundtable for this issue’s Morningstar conversation, which we do every issue. We had Ramona Persaud of Fidelity Equity Income FEQIX, Hilda Applebaum of American Funds, the Income Fund of America CAIBX, and Tom Huber from T. Rowe Price Dividend Growth PRDGX. All three funds are rated Gold by analysts, which means that they expect these funds to outperform their peers over the long term. It’s very impressive, Gold-rated funds. What’s interesting here is that each manager, even though they’re focused on dividends, takes a different approach. Persaud takes a total-return approach. Applebaum allocates between equity-income stocks and fixed-income securities, and Huber focuses on dividend growth, stocks that are growing their dividends every year. This leads them to different types of investments, different types of stocks. But one thing they have in common is that they each take a very prudent, disciplined long-term approach to their strategies, and we think that the everyday investors could definitely learn from this.
Hampton: What’s the takeaway for investors who want to pursue a balanced approach?
Kerns: Well, you’ve got to read the magazine.
Hampton: Step one.
Kerns: No, seriously. Number one, I think, the big point that we tried to convey in the magazine is just don’t look at dividends in isolation. Don’t go for that, “Oh, it’s a high yield. It’s 10%. I can’t go wrong.” Because there could be something underlying the security, that there’s a reason why they are offering such a high yield, so that’s number one. Number two would be just don’t strive for yield at the expense of growth and total return, kind of related. We urge people to take a total-return approach, which means yes, you want to focus on dividends, but there’s more to return than just dividends. I would say that’s the final message. Total return, that’s kind of a middle ground. It’s not swinging for high yield. It’s not just looking at capital appreciation. You’ll still get your income, but you’ll be invested in high-quality stocks or mutual funds.
Hampton: We’re giving people the opportunity. We’re going to bring the magazine back up. How do we get this magazine either in our inbox or our mailbox?
Kerns: We have a digital version and an analog version, a print version. The best, easiest way is just Google Morningstar Magazine. It’ll take you to our homepage, and the subscriptions are free at this time, so take advantage of it. Yeah, hope you check it out.
Hampton: Well, everyone listening and watching, we’ll include a link in the show notes so you can subscribe. Jerry says it’s free for now. You want to get it while it’s still free.
Kerns: There’s no guarantee. Yeah.
Hampton: Well, Jerry, thank you for coming today.
Kerns: Well, thank you. This has been a blast. I appreciate it.
Hampton: That wraps up this week’s episode. Thanks for making this show part of your day. A couple of reminders. Give Investing Insights five stars on Apple Podcasts to help others find the work we’re producing for you, and subscribe to Morningstar’s YouTube channel to watch new videos from our team. Thanks to senior video producer, Jake Vankersen, and associate multimedia editor, Jess Bebel. I’m Ivanna Hampton, editorial multimedia manager at Morningstar. Take care.
