How to weather dividend growth amid volatility – and sow the seeds of future performance

The first six months of 2025 have already provided their fair share of surprises: DeepSeek, Liberation Day, German fiscal reform – market-moving headlines which captivated investors. The dominance of the Magnificent Seven (Mag 7) was called into question, US tariffs redefined the terms of global trade and Europe emerged as the standout performer in a world previously transfixed by US exceptionalism. Volatility spiked to levels not seen since COVID-19, yet the widespread panic proved short-lived. Equity markets rallied strongly from their lows, recouping most of the losses from a turbulent March and April.

As a dividend investor, there’s a clear goal amidst the constant barrage of news: an unwavering focus on dividend growth to provide a rising income stream every year. Dividends provide certainty in a world of uncertainty and the compounding effect of re-investing rising distributions has delivered compelling total returns over the long term through a combination of income growth and capital growth.

“With dividend growth as our guiding principle, we are positioning our portfolios for a variety of potential scenarios.”
 

With dividend growth as our guiding principle, we are positioning our portfolios for a variety of potential scenarios. A broadening market characterised by a rotation away from the Mag 7 has been a welcome boon for many active investors, but it is essential that we maintain our discipline. We must not allow ourselves to become complacent about the valuations attached to some of our strong performers. Valuation and fundamentals remain the key determinants of our decision-making and we see attractive areas to recycle our profits, particularly in more economically-sensitive sectors.

New economy bellwethers hold sway

Much as we would like the new market regime to continue, we cannot take the tailwind of increasing breadth for granted. The recent market rebound, led by a resurgence in the Mag 7, provided a telling reminder that these new economy bellwethers continue to hold sway. Technology may not be home to the highest dividend yields in the market, but we believe the sector provides ample opportunity for dividend growth. 

Microsoft, with its exemplary track record of consistent dividend increases, has been a longstanding holding and a mainstay in the face of tech rallies, the only change over the years being its position size in the portfolio. We increased the weighting in Microsoft meaningfully during the market downturn and benefited subsequently during the upturn. Meta Platforms, a more recent addition, plays a similar role in protecting performance. The owner of Facebook and Instagram became eligible for our dividend growth strategy with the announcement of its maiden dividend last year and diversifies our exposure to the new economy.

Weathering recession concerns

At the other extreme, we must be prepared to weather any concerns about a recession, especially at a time when the impact of tariffs remains an unknown. 

Since the summer of last year, we have been increasing exposure to defensive quality as valuations became more palatable following a savage de-rating. Being selective remains paramount, however, as the quality segment of the portfolio must deliver on its designated role: being utterly dependable in the toughest of times. Our holdings in quality therefore must be highly reliable in their defensiveness or offer the comfort of value to protect any potential downside. We are encouraged by the opportunity we see in a variety of world-class businesses and taking advantage of attractive entry points we have not seen in many years.

Navigating uncertain markets requires flexibility to cope with a variety of market conditions. Just as different parts of the portfolio perform at different times, different parts of the portfolio present buying opportunities at different times. In our view,  acting on those opportunities will sow the seeds for future performance, backed by the solid foundation of a rising dividend.
 

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast, nor a recommendation to purchase or sell any particular security.