The “Secret Sauce” to Monster Gains

If you pay attention long enough, you’ll notice how markets rotate and strategies shift. This is life as a market participant.

That said, there’s a strategy that’s worked in all sorts of market conditions. I’m talking about dividend growth investing.

When It Pays to Be a Shareholder

Dividends are simply a share of profits that companies pay investors for owning shares. Companies that increase their dividends over time reflect healthy underlying businesses.

And this is when it pays to be a shareholder.

You may have heard investing legend Warren Buffett describe dividend growers as the “secret sauce” to monster gains. He’s 100% right.

Companies that grow dividends are worth considering for your portfolio because of their monster gains and their ability to dampen volatility.

Interest Rate Cuts Help Dividend Payers

The Federal Reserve switched to a more doveish stance that includes cutting interest rates. In 2022, when the Fed hiked rates, money flew into money market accounts. There’s now over $7.5 trillion in those accounts earning around 3.5%.

When the Fed cuts rates, those yields will decline, making money market accounts less attractive:

At the same time, it makes dividend growing stocks more attractive due to their ability to gain value and pay income.

To be clear, dividend investing is not a recent undertaking. Dividends have been a substantial portion of the total returns for the S&P 500 (SPX) for decades:

Even with a coming correction “inevitable,” dividend stocks are positioned well. Markets don’t rise in a straight line. This is when dividend stocks offer an edge.

Since 1975, when the S&P 500 corrects by 10% or more, dividend paying stocks outperform an equal weighting by 5.5%, and even better, by 13.7% during heightened volatility:

How can you invest without dividends? Owning dividend stocks is a MUST.

What Attracts Big Money

Dividend stocks can provide gains, but you must be choosy. The best of the best have strong fundamentals and institutional demand behind them.

One example is health care giant Eli Lilly and Company (LLY), which is a leader in many treatments. It’s been a great dividend grower over the years.

The company saw revenues surge to $45 billion in 2024. Estimates peg sales to climb to $63.3 billion in 2025 and $75 billion in 2026. Also, LLY’s 2024 net income was $10.6 billion. Analysts think net income will surge to $21.2 billion this year and $28.2 billion in 2026.

Below is a 10-year LLY chart. On top is the increasing dividend payouts. Notice on the bottom how the dividend yield of 0.64% has been shrinking as stock appreciation has been aggressive:

This is a powerful combination to build wealth.

But don’t just chase huge yields. Instead, look for companies with growing businesses, low payout ratios, and growing payouts over time, like LLY:

This is what attracts Big Money.

A Wave Worth Riding

As the Fed lowers rates, prepare for dividend growth companies to perform well. History shows it’s a wave worth riding.

To find the top dividend stocks, focus on all-star businesses loved by institutions. MoneyFlows can help you find them.

If you are a Registered Investment Advisor (RIA) or a serious investor, take your investing to the next level and follow our free weekly MoneyFlows insights.

Disclosure: the author holds no position in LLY at the time of publication.