Navigating the Equity Income Landscape: Three Key Approaches

Additional content provided by Tucker Beale, Analyst, Research.

How Do You Like Your Dividends?

Note: The topic of this blog was featured in our October 1 Street View video.

The idea of lying on the beach while “your money works for you” is often idealized in the financial media and by financial professionals. And why not? Investors love passive income, whether in the form of coupon interest from a bond, interest received from a bank or money market account, rental income from a real estate investment, or dividends from a stock portfolio — which is the focus of this blog. But what’s the best approach when it comes to developing an equity income strategy? In today’s blog, we will cover what exactly a dividend is; review the concept of a dividend portfolio strategy, also known as an equity income strategy; and analyze two common approaches, high dividend yield and dividend growth — as well as a lesser-known strategy, high shareholder yield.

A topic we cover with investors quite frequently is dividend investing — that is, owning a portfolio of stocks with the specific aim of generating income, in addition to long-term capital appreciation. But what is a dividend, exactly?

A few facts:

• A common stock dividend is a payment made by a company to its shareholders, usually in cash or additional shares, as a reward for owning common stock.
• A company declares each dividend before it is paid, typically on a quarterly cadence.
• Dividends are not contractual obligations like interest payments on a bond — they are approved by a company’s board of directors, and can be reduced, increased, or cut completely at the discretion of company management.
• Unlike interest payments, dividend payments are not an expense that reduces reported net income — they are paid out of “retained earnings,” or the cumulative income a company has generated over time.
• Dividends are declared on a per share basis — for example, a company declares a 30 cent per share dividend on July 31, 2025, to stock owners as of August 15 to be paid on August 29. Meaning for every share of that company stock owned, an investor would receive 30 cents.
• Dividend yield is a measure of the amount of dividend payments received in the past, or expected to be received in the future, relative to the price of one share of a company’s stock.
• And, as a final fact — about 80% of S&P 500 companies pay a regular common dividend.

With the dividend basics down, we’ll explore a few common strategies investors employ, the relative benefits of each, and how we think about integrating these principles into our work on the equity research team.

Dividends and Income, Served Three Ways

The first, and likely the most common strategy, would be the high dividend yield approach. This method simply screens a universe of stocks, such as the S&P 500, for those with the highest dividend yield and purchases a percentage of them — generally the top 10, 20, or 25%. However, one thing to be mindful of is that a stock with a high dividend yield, which recall is simply dividend payment divided by share price, may have a high yield because the share price has fallen significantly, which may signal perceived weakness in the business among investors, and weakness in the business may lead to a decrease or suspension of the dividend altogether. This is known as a yield trap — a close cousin to the value trap.

Next, there is the dividend growth strategy. This approach focuses on owning shares of companies that have regularly grown their dividend per share payments over some period, typically a long enough time to ensure the company is committed to dividend growth. Why seek out dividend growers? We point to two primary reasons; 1) it signals strength in the underlying business, as in order to be able to safely grow (and cover) its dividend per share payout, a business must also generally be growing its net income, or earnings per share; and 2) a growing dividend payment means that regardless of the initial equity investment made, the dividend income received gets larger over time, therefore reducing the negative effect of inflation on your income.

Finally, we examine high shareholder yield — which is defined as the sum of all forms of returned capital to shareholders — dividends and share buybacks. Debt reduction is often included in shareholder yield calculations, as reducing debt from the invested capital base of an enterprise increases shareholders’ ownership of said enterprise. However, for our purposes of considering direct income-generating activities, we exclude debt reduction from the calculation. How do share buybacks provide income to shareholders, you may be asking. Well, as a part-owner in the business, you can sell some of your shares that are being bought back by the company and still own the same proportional share of the business, but with cash in hand. Something to consider with buybacks as well: in the scenario we laid out, share buybacks put the taxable event, potential capital gains on the sale, at the discretion of the investor, while dividend payments create the taxable event at the discretion of the company. This is one reason some investors consider share buybacks a “more tax-efficient” method of capital return.

Three Strategies: Current Yields and Historic Returns

Putting this research into practical application, what do we know about these three equity income strategies? As fate may have it, we aren’t the first to consider the strategies, and there are several indexes (and ETFs) that track strategies like the three we have reviewed, allowing us to see typical characteristics, such as historical dividend yields, as well as take a long-term view on how these strategies have performed. We have chosen representative indexes based primarily on the applicability of the universes (U.S. large and mid caps) and the amount of history available. The S&P 500 High Dividend Index represents the high dividend yield strategy; the S&P US Dividend Growers Index represents the dividend growth strategy; and the Morningstar US Dividend and Buyback Index represents the shareholder yield strategy.

As shown in the “Equity Income Strategies and S&P 500: Index Level Dividend Yield” chart, the high dividend strategy, reflected here as the S&P 500 High Dividend Index, has the highest dividend yield, followed by the high shareholder yield strategy, reflected here by the Morningstar US Dividend and Buyback Index, and finally by the dividend growth strategy using the S&P US Dividend Growers Index. We also include the S&P 500 dividend yield, for context — but note that the S&P 500 index includes about 100 stocks that don’t pay a dividend at all, which pulls the overall yield downward.

Equity Income Strategies and S&P 500: Index Level Dividend Yield

Source: LPL Research, Bloomberg 10/02/25
Disclosures: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

In the “Equity Income Strategies and S&P 500: Total Return” chart, we highlight the total return of our three dividend strategies and the S&P 500. The broad-based S&P 500 index has performed the best in terms of our lookback, but only slightly better compared to the high shareholder yield strategy and the dividend growers strategy. The high dividend yield strategy has lagged the other strategies, as well as the broad market, over the last 19 years.

Equity Income Strategies and S&P 500 Total Return

Source: LPL Research, Bloomberg 09/30/25
Disclosures: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

Why have high dividend yielding stocks underperformed the market and the other two dividend strategies so dramatically? Some of the performance certainly has to do with the market environment we have lived through over the period analyzed, a period when the broad market has been led by growth stocks that typically trade at lower dividend yields, if they pay a dividend at all. In the same period, the S&P 500 Growth Index outperformed the S&P 500 Index and the S&P 500 Value Index, on a cumulative total return basis, by approximately 328% and 608%, respectively. But also, stocks tend to perform on expectations of future growth, and if you implement a strategy of picking stocks that pay you the most today in dividends, the thought process goes that you are taking tomorrow’s gains today. As they say, there is no free lunch when investing in the stock market.

Conclusion

Every income-oriented investor has their preference when it comes to dividends and equity income strategies, and in practice, professional investors leverage a mosaic approach to generating equity returns (i.e., capital appreciation and current income). Therefore, most will incorporate aspects of each of the different styles discussed. Our goal is to educate investors on different approaches, whether they are choosing an active strategy, a passive/rules-based strategy, or building their own portfolio of dividend paying stocks.

LPL Research’s Strategic and Tactical Asset Allocation Committee (STAAC) remains neutral on global equities, with benchmark allocation recommendations across domestic, developed international, and emerging markets. Within the U.S., we prefer large caps over small caps, and growth over value.