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I explain why UnitedHealth Group had such a big impact on the Dow before going into its earnings and updated guidance. I then share takeaways from the other eight earnings reports.

There’s lots to discuss, so let’s get right to this week’s deets:

• The DI model portfolio saw a mix of results: two positive surprises, five in-line reports and two misses.

• The Dow’s price-weighting mechanism allowed UnitedHealth Group to single-handedly drag the average down.

• Tariffs and uncertainty were a common theme during many of the earnings conference calls.

UnitedHealth Group Warns and Drags the Dow Down

Last week, UnitedHealth Group reported in-line earnings but cut its full-year 2025 adjusted earnings guidance from between $29.50 and $30.00 per share to between $26.00 and $26.50 per share. Traders responded by sending shares of the stock down 22%. This plunge resulted in 805 points being deducted from the Dow on Thursday, April 17.

Such a large point loss was possible because the Dow is price-weighted. The higher a Dow component’s share price is, the more influence the stock has on the average’s value. Shares of UnitedHealth Group closed on at $585.04 on Wednesday, April 16, 2025—the highest share price of any Dow component.

The S&P 500 index, conversely, is market-capitalization weighted. Companies with the biggest market cap have the most influence on the index.

To better illustrate the difference, according to data from State Street Global Advisors as of the end of last week, UnitedHealth Group accounted for 7.47% of the SPDR Dow Jones Industrial Average ETF Trust’s (DIA) value. Its weight in the SPDR S&P 500 ETF Trust (SPY) was just 0.94%.

An ongoing criticism of the Dow is its price-weighted methodology. I agree with those criticisms since a stock’s price is partially influenced by whether a company’s board of directors chooses to split a stock whose share price exceeds a certain dollar amount (e.g., $100). UnitedHealth Group’s last stock split was 20 years ago. UnitedHealth Group closed at $424.25 per share on Thursday, April 24, 2025; only 70 exchange-traded stocks had a higher share price.

Medicare and UnitedHealth Group’s Lowered Guidance

Three separate factors caused UnitedHealth Group to cut its full-year 2025 earnings guidance. First, care activity in UnitedHealth Group’s Medicare Advantage business increased at twice the rate the company had projected. Put another way, the company saw a significant increase in claims.

Second, a portion of the new members to Optum Medicare were previously covered by plans that were exiting markets. These new members used medical services significantly less than expected last year. “[This] led to 2025 reimbursement levels well below what we would expect and likely not reflective of their actual health status,” explained CEO Andrew Witty.

Finally, risk model changes by the Centers for Medicare and Medicaid Services (CMS) have impacted reimbursement rates for “many of the current and new complex patients” UnitedHealth Group serves.

Last week was the first time UnitedHealth Group reported earnings below the consensus estimate since 2008, according to Reuters. (UnitedHealth Group earned $7.20 per share, 1.3% below the S&P Global consensus estimate. This was close enough to be considered an in-line surprise.) The lowered guidance means UnitedHealth Group will realize a calendar-year earnings decline for the first time since 2008 as well, according to MarketWatch.

UnitedHealth Group’s Dividend Grades

UnitedHealth Group currently has a Dividend Strength Grade of B and a Dividend Growth Grade of A. Both indicate that the stock remains fundamentally strong. We will be watching to see if these Medicare-related issues are temporary or an ongoing headwind.

Dividend Pillars for UNH

A Mixed Bag of Earnings From the Other Eight Companies

As noted above, the DI model portfolio saw a mix of positive surprises, in-line reports and negative surprises. Counting all earnings results announced to date, the DI model portfolio’s first-quarter 2025 earnings scorecard stands at four positive surprises, five in-line reports and two negative surprises.

Here are recaps of the other earnings reports released last week and this week:

• Abbott Laboratories’ (ABT) adjusted first-quarter earnings totaled $1.09 per share, in line with expectations. Regarding guidance and tariffs, CEO Robert Ford told an analyst: “We’re already considering raising our [earnings] guidance. But tariffs are here. So, we felt that reaffirming our guidance [of $5.05 to $5.25 per share on adjusted basis for full-year 2025] is already, I think, a pretty strong statement.”

• CME Group Inc.’s (CME) first-quarter adjusted earnings of $2.80 per share were one penny shy of the S&P Global consensus estimate but more than close enough to be considered in line. The volatility in the financial markets benefited the company, which saw record average daily contract volume. CME Group raised its margin requirements “in various products across all asset classes” given the ongoing level of volatility.

• Eastman Chemical Co. (EMN) earned $1.91 per share on an adjusted basis, in line with the S&P Global consensus estimate. However, the company’s second-quarter 2025 guidance for adjusted earnings of between $1.70 to $1.90 per share is below the consensus estimate of $2.16 per share. Executives currently anticipate a “$30 million net tariff impact related to the U.S.-China trade dispute.”

• PepsiCo Inc. (PEP) earned $1.48 per share on a core basis, in line with the S&P Global consensus estimate. The company lowered its full-year 2025 guidance: Core earnings are now expected to be “approximately even” with last year instead of growing by mid-single digits. CFO Jamie Caulfield blamed the changed outlook on tariffs, “heightened macro and consumer uncertainty,” and Frito-Lay Inc.’s “subdued performance.”

• Quest Diagnostics Inc. (DGX) earned $2.21 per share on an adjusted basis, beating the S&P Global consensus estimate by 2.8%. Though earnings were $0.06 per share above analysts’ forecasts, Quest Diagnostics had previously warned in March that first-quarter earnings would be $0.10 per share lower than its initial expectations. The company did maintain its full-year 2025 adjusted earnings guidance of between $9.55 and $9.80 per share. Regarding tariffs, CEO Jim Davis says that Quest Diagnostics sources “less than 1%” directly from China.

• Snap-on Incorporated’s (SNA) first-quarter earnings of $4.51 per share missed analysts’ expectations. Executives blamed last quarter’s earnings decline—which was particularly attributable to a decline in tools group segment revenues—on uncertainty related to tariffs, government spending and geopolitical events. “Uncertainty” was mentioned eight times on the conference call, and “fog” was mentioned nine times.

• Texas Instruments (TXN) earned $1.28 per share during the quarter, beating analysts’ expectations. Revenue grew on a year-over-year basis, with the industrial markets segment realizing higher sales for the first time in eight quarters. Executives view industrial demand as starting to rebound from a bottom. About 20% of Texas Instruments’ sales are to China, but no tariff-related changes in orders have been noticed yet.

• Tractor Supply Co.’s (TSCO) earnings of $0.34 were $0.03 per share short of the S&P Global consensus estimate, missing expectations. This was primarily due to adverse weather conditions. The company widened its full-year 2025 net sales growth guidance from between 5% to 7% to between 4% and 8%. Earnings guidance was widened from $2.10 to $2.22 per share to $2.00 to $2.18 per share. CEO Hal Lawton cited spring softness in sales, continued consumer cautiousness about making big ticket purchases and “a range of scenarios related to tariff costs.”

One More Busy Week

Eight model portfolio companies are scheduled to announce earnings next week. Cincinnati Financial Corp. (CINF) will report on Monday, April 28, followed by Pfizer Inc. (PFE) on Tuesday, April 29, and Oshkosh Corp. (OSK) on Wednesday, April 30. Amgen Inc. (AMGN), EOG Resources Inc. (EOG), Hershey Co. (HSY), Huntington Ingalls Industries Inc. (HII) and IDEX Corp. (IEX) will all report on Thursday, May 1.

New issuances of corporate bonds slowed to a crawl, with just one offering completed between Wednesday, April 2, and Tuesday, April 8. The uncertainty over tariffs caused borrowing costs to rise. These higher costs, in turn, led corporations to postpone issuing new debt.

A significant slowdown in bond issuances is an economic problem because it means less investment in long-term projects. It also signals tighter access to credit, which has a ripple effect across the economy.

The U.S. and China are continuing to escalate trade tensions. Let’s hope that these tensions do not escalate either globally or militarily.

With this said, here are this week’s deets:

• Both revenues and earnings are forecast to have risen during the first quarter of 2025.

• A majority of stocks in the Dividend Investing (DI) model portfolio are also forecast to have realized earnings growth.

• BlackRock Inc. (BLK) beat analysts’ estimates this morning by 11.6%.

• The U.S. financial markets and the AAII office will be closed next Friday.

Previewing First-Quarter Earnings for the S&P 500

The consensus LSEG I/B/E/S earnings estimate scorecard as of the morning of April 11 calls for S&P 500 index member companies to report first-quarter earnings growth of 8.0% on a blended basis (reported and projected). This is down from the 12.2% first-quarter growth projected at the start of 2025 and the 14.3% growth projected back in October 2024.

Revenues are projected by analysts to have grown 4.1% in the first quarter. This is down from the January 1 projection of 4.9% and last October’s projection of 5.3%.

Analysts believe the health care sector will see the strongest earnings growth, with a year-over-year increase of 38.2%. Revenues are also expected to be up strongly for the sector. Technology is a strong second with 16.1% projected earnings growth. Artificial intelligence (AI) remains a key driver for many technology companies.

Energy is expected to be the weakest sector, with a 16.9% projected drop due to lower oil prices. No other sector is expected to incur a double-digit drop in earnings.

I expect to see many companies put asterisks by their full-year guidance this earnings season due to the tariffs.

First-Quarter Earnings for the DI Model Portfolio

The median blended earnings growth rate for stocks in the DI model portfolio is 2.9%. Fifteen stocks are projected to report year-over-year growth in their quarterly earnings. Nine are projected to report declines.

There is a high level of dispersion in the growth rates.

Amgen Inc. (AMGN) is forecast to report year-over-year growth of 2,126%. The company incurred a mark-to-market loss on an investment last year and reported higher amortization expenses from its acquisition of assets from Horizon Therapeutics PLC. This led to Amgen reporting a $0.21 loss during its first quarter of 2024 and setting up easy year-over-year comparisons for its first quarter of 2025.

UnitedHealth Group Inc. (UNH) incurred losses during the first quarter of 2024 related to a cyberattack on its Change Healthcare segment and currency fluctuations. The company’s earnings are projected to have rebounded to $7.29 per share during the first quarter of 2025.

Cincinnati Financial Corp. (CINF) is projected to have the largest year-over-year drop. Analysts are calling for a first-quarter 2025 loss of $0.46 per share. This compares a first-quarter 2024 profit of $4.78 per share. Two months ago, Cincinnati Financial warned of $450 million to $525 million in wildfire losses.

High cocoa prices have soured earnings forecasts for Hershey Co. (HSY). Analysts expect the candy and snack company to have incurred a 49% drop in year-over-year earnings to $1.988 per share.

EOG Resources Inc. (EOG) has the largest level of dispersion in its first-quarter 2025 earnings estimates. The first-quarter consensus estimate is $2.733 per share. The highest estimate is $3.26 per share. The lowest earnings estimate is $1.84 per share.

Huntington Ingalls Industries Inc. (HII) and Cincinnati Financial also have high levels of dispersion, as shown in the table below. High levels of disagreement among analysts increase the odds of a company issuing an earnings surprise. Unfortunately, dispersion does not predict whether the surprise will be a positive or a negative one.

BlackRock’s Beat

BlackRock became the second company in the DI model portfolio to beat analysts’ expectations. Its first-quarter 2025 earnings were 11.6% above the S&P Global consensus estimate. Net inflows were positive despite the U.S. market’s downturn. On the earnings conference call, CEO Larry Fink described the markets as functioning well despite the recent volatility. He also emphasized the company’s focus on introducing more infrastructure-related investment products.

A Holiday-Shortened Week With Earnings

As noted above, the U.S. financial markets and the AAII office will be closed next Friday, April 18, in observance of Good Friday. We will resume our regular weekly commentary in two weeks.

Join me and other AAII analysts on Monday, April 14, at 7:00 p.m. Central Time, for a live webinar on recent market events. We will leave plenty of time for your questions. Register here.

Abbott Laboratories (ABT) will report on Wednesday, April 16. Both Snap-on Incorporated (SNA) and UnitedHealth Group will report on Thursday, April 17.

Wishing a happy Easter and a happy Pesach to those of you observing the respective holidays.

The big news this week was President Donald Trump’s tariff announcements. Global stock markets reacted negatively yesterday in response. In particular, the major U.S. indexes opened down and extended their losses late into the day. I provided guidelines and perspectives for staying invested during this uncertainty in yesterday’s Investor Update.

I expect we will get a better understanding of the impact tariffs will have on U.S. corporations in the coming weeks as companies provide updated revenue and earnings guidance in their first-quarter 2025 reports.

Here are this week’s deets:

• The DI model portfolio beat its benchmark, the iShares Dow Jones U.S. ETF (IYY), for a third consecutive month in March.

• Seven model portfolio holdings rose in value last month, and an additional 10 holdings fared better than the iShares Dow Jones U.S. ETF.

• Huntington Ingalls Industries Inc.’s (HII) dividend yield of 2.7% implies that the stock is attractively valued.

March Roared Like an Angry Lion

The S&P 500 index suffered its biggest monthly drop in more than two years during March. The blue-chip index shed 5.6% of its value during the month. The iShares Dow Jones U.S. ETF fared even worse. It lost 5.8% in March. (As a quick aside, the S&P 500 lost 4.8% yesterday while the iShares Dow Jones U.S. ETF plunged 5.0%. The DI model portfolio only declined 2.8%.)

Uncertainty over tariffs and the extent of the economic headwinds they could cause were the primary reasons for the downward pressure. High valuations have helped technology-related stocks get scorched like a piece of wood thrown into a bonfire. Information technology, consumer discretionary and communication services—which account for nearly 50% of the S&P 500’s market capitalization when combined—were the worst-performing sectors.

Dividend stocks held up better. The S&P 500 Dividend Aristocrats index, which tracks large-cap companies that have raised their dividends for at least 25 consecutive years, declined 1.3%. The DI model portfolio beat out the S&P 500 Dividend Aristocrats with a 1.2% decline.

March was the third consecutive month that the DI model portfolio has outperformed the iShares Dow Jones U.S. ETF. The ETF holds over 1,000 of the largest U.S. stocks. The DI model portfolio ended March with a year-to-date gain of 1.5%. The iShares Dow Jones U.S. ETF was down 4.6% on a year-to-date basis.

During March, seven DI model portfolio holdings realized gains.

• The biggest gainers were Huntington Ingalls Industries and UnitedHealth Group Inc. (UNH). Shares of Huntington Ingalls Industries surged 16.2% following a call by President Trump to resurrect the U.S. shipbuilding industry. Scroll down for more about Huntington Ingalls Industries.

• UnitedHealth Group rebounded as well. The stock gained 10.3% in March after being knocked down in February over allegations about its Medicare billing practices. The lack of any additional news helped the stock. Also playing a role is the lower economic sensitivity of health care stocks relative to other sectors.

Seventeen model portfolio stocks fell in value last month. Ten of them realized smaller losses than the iShares Dow Jones U.S. ETF did.

• Nike Inc. (NKE) was the worst performer. It was kicked downward 20.1% after providing disappointing revenue and earnings guidance. The company is updating its strategy and product line. Tariff concerns led to big price drops in many footwear makers yesterday, including Nike, On Holding AG (ONON) and Hoka brand owner Deckers Outdoor Corp. (DECK).

• There wasn’t any company-specific news to blame for Eastman Chemical Co.’s (EMN) 10.0% slide. The decline likely reflects market concerns about potential tariff impacts.

The DI model portfolio’s yield was 2.6% at the end of March. The iShares Dow Jones U.S. ETF’s yield, in comparison, was just 1.0%. The ETF paid its quarterly distribution a couple of weeks ago.

• Pfizer Inc.(PFE) remained the highest-yielding stock in the model portfolio. Its yield was 6.4% at the end of March.

• IDEX Corp. (IEX) continued to have the lowest yield at 1.4%.

• BlackRock Inc. (BLK) remains the only model portfolio holding with a Dividend Valuation Grade of F. Its 2.1% yield is barely above its five-year average low of 2.0%. A drop below 2.0% would give the DI approach reason to consider replacing the stock.

Huntington Ingalls Industries Sails With an Attractive Valuation

Huntington Ingalls Industries designs and builds military ships and related technologies. Its largest segment by revenue, Newport News Shipbuilding ($6.0 billion), constructs nuclear-powered aircraft carriers and submarines. Ingalls ($2.8 billion) construct nonnuclear ships for the U.S. Navy and U.S. Coast Guard. The mission technologies segment ($2.9 billion) focuses on technology and processes for military operations and information gathering, cyber warfare, warfare training simulations, and other related services and products.

The U.S. Navy accounted for 80% of the company’s revenues last year. The U.S. Coast Guard and the U.S. Department of Defense (DOD) are the other big customers.

Consolidated revenues increased 0.7% last year. Earnings per share totaled $13.96 per share, down from $17.07 per share in 2023. Staffing issues stemming from the pandemic adversely impacted margins in 2023. The S&P Global consensus estimate calls for earnings to decline to $13.32 per share this year before rebounding to $15.75 per share in 2026.

Shares of Huntington Ingalls Industries yield 2.7%. This is near the company’s five-year average high yield of 2.9%. The company repurchased 608,000 shares last year. Those buybacks led to a 1.5% reduction in the share count. Combined, the dividend yield and shareholder yield equate to a Dividend Valuation Grade of B (good value).

Huntington Ingalls Industries’ Dividend Growth Grade is C (average). The company raised its dividend by 3.8% last October. This was the fourth consecutive year that dividend increases were limited to approximately 5% or less. Cash flow from operating activities fell last year due to a decline in earnings and an increase in accounts payable and accruals.

The stock’s Dividend Strength Grade is also C (average). Huntington Ingalls Industries’ earnings payout ratio of 37.6% is high relative to its sector peers. While acceptable on an absolute basis, it is also at a five-year high for the company. Meanwhile, the times interest earned ratio of 7.3x is strong. Huntington Ingalls Industries has raised its dividend for 12 consecutive years.

Dividend Pillars for HII

Source: AAII Dividend Investing. Data as of 4/2/2025.

First-Quarter Earnings Season Is Officially Upon Us

First-quarter 2025 earnings season for companies operating on calendar-year quarters will start next week with large financial companies reporting. BlackRock will announce its results in the morning on Friday, April 11.

Here is quick summary:

• The DI Ideas list is a good place to start looking for stocks to add to your portfolio; it is suggested that investors focus on the stocks marked as held in the DI model portfolio.

• Daily returns for the stocks held in the model portfolio can be seen on the Performance tab of the Portfolio page.

• The DI model portfolio not only yields more than market, it also provides diversification and is less risky.

• The DI approach uses the free-cash-flow payout ratio in its analysis because cash is needed to pay dividends. (Earnings are just an accounting figure.)

Which Stocks Should I Target First?

There are 24 stocks currently held in the DI model portfolio. As stated in the DI User Guide, the more stocks you own, the greater the portfolio’s diversification and the lower the portfolio risk.

If you choose to hold less than 24 stocks, it is imperative that you divide your initial investment as equally as possible among stocks from different industries with an equal initial investment amount in each stock. You can select stocks by dividend yield, earnings growth rate or the date they were added to the DI model portfolio (newest to oldest). It is strongly advised that you hold at least 12 stocks, though holding more stocks will increase your portfolio’s diversification and lower its risk.

A good place to start looking for candidates to add to your portfolio is the DI Ideas list. This shows the stocks meeting the initial quantitative requirements as defined by the Dividend Pillars: valuation, growth and strength.

DI model portfolio holdings appearing on the DI Ideas list are designated by a check mark in the Held in Tracking Portfolio column on the right-hand side. These would be the first stocks to consider.

Where Can I See Daily Returns for DI Stocks?

The DI website’s Portfolio page contains seven tabs. The main Holdings tab shows you the total return for each stock since addition to the DI model portfolio. The next tab, Performance, shows you the daily change in the stocks’ prices (on a delayed basis) along with their price and total return since being added to the portfolio.

You can also see the risk index for each stock on this tab. The risk index shows how volatile each stock has been over the past three years relative to the benchmark iShares Dow Jones U.S. ETF (IYY). Values below 1.0 indicate that a stock’s price has been less volatile. Values above 1.0 indicate that a stock’s price has been more volatile than the benchmark.

An individual stock’s relative volatility matters much less than the overall volatility of the portfolio. This leads me to the next question.

Why Compare the DI Model Portfolio to the iShares Dow Jones U.S. ETF?

The iShares Dow Jones U.S. ETF is a market-capitalization-weighted fund that holds more than 1,000 U.S. stocks. It provides access to 95% of the domestic stock market’s capitalization. This makes it a good proxy to use as a benchmark for the market’s return.

While a market benchmark is useful for comparing returns against, there are key differences between the DI model portfolio and the iShares Dow Jones U.S. ETF.

The DI model portfolio emphasizes dividend growth and low to moderate valuations. The iShares Dow Jones U.S. ETF emphasizes market cap above all else. By design, the iShares Dow Jones U.S. ETF’s characteristics are significantly influenced by its largest stocks. These are mostly growth- and technology-oriented stocks.

This difference shows up in the R-squared values. R-squared measures how much of a portfolio’s returns can be explained by a benchmark. The DI model portfolio’s R-squared value was 0.54 for the 12-month period ending in February 2025. This shows that only about half of the DI portfolio’s performance can be explained by the iShares Dow Jones U.S. ETF’s returns over this recent time period.

Over a three-year period, the DI model portfolio’s R-squared is 0.81—a number that still represents a differentiated approach to stock selection. (A value of 1.00 implies that all of portfolio’s returns are explained by the market.)

I point this out because the DI model portfolio’s risk index is 0.97. This number indicates that over the past three years, the DI model portfolio has been less volatile than the iShares Dow Jones U.S. ETF. It also shows that the portfolio has been doing a good job in terms of diversification. When you combine different stocks in a portfolio with a focus on equal weighting, you end up with a less volatile portfolio.

To sum this up, the DI model portfolio yields more than the market portfolio (2.7% versus 1.0%), provides diversification against the market portfolio and is less risky. Such a comparison is only possible if we track a market benchmark like the iShares Dow Jones U.S. ETF.

How Is Free Cash Flow Calculated?

A subscriber recently asked about the free-cash-flow- per- share (FCFPS) payout ratio, which is reported on the Dividend Analysis tab of the Portfolio page. This metric shows the percentage of free cash flow paid out as dividends.

Free cash flow is cash flow from operating activities less capital expenditures (capex) and dividends. The DI approach modifies it to cash flow from operating activities less capex for the purposes of calculating the ratio.

The free-cash-flow-per-share payout ratio differs from the more commonly used earnings payout ratio.

The earnings payout ratio shows what percentage of earnings are paid out as dividends. It is a measure commonly used by companies. The downside of this ratio is earnings. Earnings are an accounting figure. Dividends are paid with cash.

A company can be profitable but not cash flow positive. This could happen if the company boosted its inventory over the past quarter or year, has yet to receive payment from customers, spent large amounts on facilities and machinery, etc. Free cash flow can be volatile due to timing issues or other reasons.

Over time, payout ratios based on earnings and free cash flow should both be positive and reasonable (especially below 100%). When analyzing each ratio, keep in mind that they differ among sectors and industries. Public utilities, in particular, have high payout ratios because their rate agreements allow for a certain return on assets.

Hello, Spring

Given all of the news headlines and stock market volatility, I want to remind you that spring has started. So has baseball; yesterday, was opening day for major league games played in North America. As a lifelong Baltimore Orioles fan, I am hoping their starting rotation of pitchers works out.

Here are the deets:

• Dividends can be found across the S&P 500 sectors, but the payout contributions are lopsided. The Dividend Investing (DI) model portfolio avoids this by using a quasi-equal-weight strategy.

• Nike started out the model portfolio’s first-quarter 2025 earnings season with a beat, but its new CEO’s overhaul has led to disappointing guidance.

• J.M. Smucker gets a Dividend Valuation Grade of B for its 4.0% yield, though dividend growth has slowed following the acquisition of Hostess Brands Inc. in 2023.

• PepsiCo announced its intent to acquire prebiotic soda company Poppi, giving it immediate entry into the fastest-growing segment of the soft drink market.

More than 80% of the companies within the S&P 500 pay dividends. This makes it easy for dividend-seeking investors to build portfolios that are diversified across sectors and industries.

Diversification is done intentionally in the DI model portfolio. As I mentioned last week, the DI approach purposely passed on adding Merck & Co. Inc. (MRK) because it would have increased the portfolio’s exposure to health care stocks. There is nothing wrong with the sector; the DI approach just avoids putting all of its eggs in a single basket.

The table below from First Trust Portfolios shows the differences in dividend payout contributions among S&P 500 sectors. This is due to the index being market-cap weighted. The information technology sector has the lowest yield but accounts for the largest contribution because it contains some of the largest companies by market cap.

Source: First Trust Portfolios, with data from S&P Dow Jones Indices.

The DI model portfolio, conversely, follows a quasi-equal-weight strategy. It seeks to establish new positions in the portfolio at a size equal to the average portfolio value of all stocks. The math is simply the total value of the portfolio divided by 24 stocks. This prevents any single stock from having an outsized impact on performance or the portfolio’s income.

Rather than rebalance the portfolio at preset intervals, the DI approach gives its winners room to run. If one stock should do well enough to account for an outsized position in the portfolio—meaning two times the average size (approximately 8.2% of the total portfolio value)—it will be trimmed. The approach also reinvests excess funds in underweight positions when there is enough cash to do so. (The portfolio is paper traded, but it is tracked as if it were a real portfolio.) This avoids the lopsidedness you see with the S&P 500.

A Few Dividend Statistics of Interest

Here are a few notes from First Trust Portfolios about what is occurring dividend-wise within the S&P 500:

• Dividend payments from the S&P 500’s constituents totaled a record $74.61 per share in 2024, up from $70.91 per share (previous record high) in 2023.

• As of March 12, 2025, dividend payments are estimated to increase to $81.65 and $86.64 per share in 2025 and 2026, respectively.

• The index’s dividend payout ratio was 35.57% on March 12. A dividend payout ratio between 30% and 60% is typically a good sign that a dividend distribution is sustainable, according to Nasdaq.

Nike Beats but Gives Disappointing Guidance

Nike handedly beat the S&P Global consensus estimate with earnings of $0.54 per share for its fiscal third-quarter 2025 ended February 28. Gross margin declined 3.3 percentage points as the company sought to clear out inventory. CFO Matt Friend guided for fiscal fourth-quarter 2025 revenues to be down “in the mid-teens [percentage] range, albeit at the low end” and for gross margins to be down “four to five percentage points.”

Though the guidance is disappointing, it is not unusual for a company that is in the process of altering its strategy. It will take time to tell if CEO Elliott Hill is making the right decisions.

An Updated Look at J.M. Smucker

It has been many months since we took an updated look at J.M. Smucker, so I am featuring the stock this week.

J.M. Smucker is a packaged food company. It is the biggest branded at-home coffee manufacturer, with Folgers, Café Bustelo and Dunkin’ among its brands. Retail coffee, as the segment is called, accounts for 34% of J.M. Smucker’s year-to-date fiscal 2025 net sales. (J.M. Smucker’s fiscal year runs from May through April.)

Frozen handheld and spreads accounted for nearly 22% of sales. This segment includes J.M. Smucker’s very popular Uncrustables sandwiches and Jif peanut butter. Pet foods—including Milk-Bone and Meow Mix—account for 19% of sales. Hostess and the sweet baked snacks category account for 14% of sales.

Fiscal third-quarter 2025 sales fell slightly from the prior-year quarter. The company blamed the decline on supply chain disruptions in the pet food segment. Adjusted earnings, however, were above the S&P Global consensus estimate. J.M. Smucker raised its fiscal-year 2025 earnings guidance by 1% last month.

The company has paid a dividend since 1960. J.M. Smucker has raised its dividend for 22 consecutive years. We will be looking for the next dividend increase to be announced in mid-July.

J.M. Smucker’s Dividend Valuation Grade is B (good value). The stock’s current dividend yield of 4.0% is above its five-year average high of 3.6%. This implies that the stock is currently undervalued.

The Dividend Growth Grade is D (weak). J.M. Smucker raised its dividend by just 1.9% last July, which was the smallest increase in many years. (The small increase occurred following the prior-year acquisition of Hostess.)

Trailing 12-month operating cash flows are down due to a drop that occurred in the company’s fiscal fourth-quarter 2024 ended in April 2024. Return on assets (ROA) is negative due to noncash impairment charges realized last quarter related to the 2023 acquisition of Hostess.

The Dividend Strength Grade is A (very strong). J.M. Smucker has not had a single dividend cut in the last 24 years. Interest payments are manageable, with a times interest earned ratio of 4.4x.

Dividend Pillars for SJM

Source: AAII. Data as of 3/20/2025.

PepsiCo Gets Into Prebiotic Sodas

PepsiCo announced its intention to acquire prebiotic soda company Poppi this week.

Prebiotic sodas are the fastest-growing part of the soft drink market, with demand driven by health-conscious consumers. Buying Poppi saves PepsiCo the time and expense of trying to break into this market with an internally created drink.

According to an Exane BNP Paribas report cited by Reuters, Poppi has an approximate 1% share of the total carbonated soft drinks category. Therefore, PepsiCo’s acquisition immediately gives it a strong foothold in this emerging segment.

First, as always, I start with the deets:

• Corrections are normal part of the market cycle; they occur, on average, once every three years.

• The Dividend Investing (DI) model portfolio has been less volatile than the broader market while also providing a stream of income.

• Last week’s addition, Oshkosh Corp. (OSK), was chosen over seven other stocks. I explain why they were passed over.

Corrections Aren’t Pleasant, but Dividends Ease the Pain

Headline risk is causing volatility to be high in the stock market. It is becoming increasingly difficult to determine what tariffs have been raised, levied, lowered or rescinded. This uncertainty makes it difficult for businesses to plan and budget. It also makes it difficult for economists to make projections about the economy.

The S&P 500 entered a correction yesterday, closing down 10% from its record high that was set just last month. While such drops always attract attention, they are not unusual. CFRA Research’s Sam Stovall counts 24 prior corrections as having occurred since the end of World War II—once every three years, on average.

Corrections are a normal part of the market cycle. While painful, they tend to bottom in a little over two months. Full recoveries take an additional four months to occur. The entire process feels longer because Mr. Market likes to take the elevator down and the stairs up.

Dividends help to ease the pain of market drops by providing an ongoing stream of portfolio income. To get the income, you must stay invested. No stocks = no dividends.

If you are nervous about the current market, I encourage you to read my latest Investor Update commentary where I offer suggestions for coping with a volatile market environment.

The Market’s Shift in Favor of Dividend Stocks

Bouts of market uncertainty often cause investors to seek less-volatile assets, including those that provide a stream of income. We have seen this play out with the DI portfolio. Year to date, the portfolio continues to outperform the iShares Dow Jones U.S. ETF (IYY), which tracks a broad market index.

The chart below from S&P Dow Jones Indices illustrates this. Focus particularly on the upper-left quadrant; it shows the subset indexes representing the type of

S&P 500 member stocks that fared the best during the first two months of this year. They include low-volatility, dividend-paying and value stocks.

Source: S&P Dow Jones Indices’ February 2025 Dashboard for S&P 500 Factor Indices.

The DI strategy not only places an emphasis on dividend growth, it also emphasizes value. The DI model portfolio has also been less volatile than the market, as indicated by its three-year risk index of 0.97. (Values below 1.0 indicate less volatility than the market.) The DI approach doesn’t purposely seek out stocks with low volatility (or low betas), but it does try to avoid highly volatile stocks.

Additionally, the DI model portfolio holds companies with the financial capability to pay and continue raising their dividend. Capturing this stream of income requires you to stay invested at all times.

Candidates Considered Before Choosing Oshkosh

A portfolio addition alert for Oshkosh was issued last week. The stock was chosen for its good Dividend Grades, attractive relative yield and strong dividend growth.

The selection process for choosing Oshkosh involved running the entire DI Ideas list through the Dividend Screener to narrow the list to just those stocks with Dividend Grades of A or B for all three dividend pillars. The passing stocks were then sorted by yield (highest to lowest) before due diligence was conducted. Oshkosh was the most attractive stock of the group.

Here are other candidates that were considered and the reasons they were not chosen:

• Avery Dennison Corp. (AVY): Its dividend growth has been good over the past few years, but its 1.9% yield (as of last week) was below Oshkosh’s 2.0% yield.

• Boise Cascade Co. (BCC): Once the stock’s five-year average yield was adjusted for its special dividend, it no longer appeared to be trading at a discounted valuation.

• Merck & Co. Inc. (MRK): It yields 3.5%, but the DI model portfolio already owns four other health care stocks.

• Northrop Grumman Corp. (NOC): This defense company was also passed on for diversification reasons. Most of DI holding Huntington Ingalls Industries Inc.’s (HII) revenues come from the U.S. Department of Defense (DOD) as well. Plus, the stock’s 1.8% yield was lower than Oshkosh’s yield.

• Qualcomm Inc. (QCOM): It had a slightly higher yield than Oshkosh, but the latter has stronger dividend growth. Additionally, Apple Inc. (AAPL) currently accounts for 20% of Qualcomm’s revenues, and this is anticipated to drop starting in 2027.

• RLI Corp. (RLI): This company’s dividend growth is slowing, and the size of its special dividends has been inconsistent.

• R. Berkley Corp. (WRB): There has been inconsistent growth in its regular dividend and its special dividend is variable.

Earnings Return Next Week

The first-quarter 2025 earnings season is starting right on the heels of fourth-quarter 2024 earnings season. Nike Inc. (NKE) will report its quarterly results on Thursday, March 20.

First, here are the deets:

• We believe Skyworks Solutions is at risk of not raising its dividend this summer, given the forthcoming drop in revenues.

• Oshkosh brings with it a streak of 11 consecutive double-digit percentage dividend increases and the financial capacity for further growth.

• The Toro Co. (TTC) beat analysts’ fiscal first-quarter 2025 earnings expectations. Tariffs were mentioned 24 times during its conference call.

• The DI model portfolio outperformed its broad market benchmark for a second consecutive month in February.

Disconnecting From Skyworks Solutions

Skyworks Solutions is being removed from the DI model portfolio out of concern that its dividend will not be raised later this year. The company will no longer be the sole supplier for a component in Apple Inc.’s (AAPL) iPhones, starting this fall with the next iPhone cycle (iPhone 17). Skyworks Solutions expects its content position in the next iPhone cycle “to be down 20% to 25%.”

Apple accounted for 72% of Skyworks Solutions’ revenues in its fiscal first-quarter of 2025, which ended December 27, 2024. Roughly 85% of those revenues were related to the iPhone. This news significantly contributed to the 36.2% loss incurred by the stock since being added to the DI model portfolio in March 2023. (The ongoing weakness in technology stocks hasn’t helped Skyworks Solutions’ stock price either.)

February’s revenue warning occurred six months after Skyworks Solutions raised its dividend by just 2.9%. This was the smallest increase since the company first started paying dividends in 2014. (The next-smallest increase was 7.7% in 2017.)

Given the combination of last year’s small dividend increase and the coming hit to revenues, we believe the risks of Skyworks Solutions forgoing a dividend increase this summer are high.

Since the stock is being removed after its ex-dividend date, current shareholders will receive Skyworks Solutions’ dividend payment on March 17.

New Addition Oshkosh Should Give DI a Lift

Oshkosh designs and manufactures a wide variety of what it describes as “purpose-built vehicles and equipment.” The access segment (48% of total 2024 sales) includes lifts and telehandlers equipment to position workers and materials off the ground. The vocational segment (31% of sales) includes firefighting vehicles, airport ground support (such as vehicles that carry luggage across the tarmac), airport gate equipment and waste disposal trucks. The defense segment (20% of sales) creates specialty vehicles and mobility systems for both the U.S. Department of Defense (DoD) and approved foreign customers. This segment also produces the electric-battery-powered postal vans you may have seen in U.S. Postal Service (USPS) ads.

Oshkosh’s fourth-quarter 2024 adjusted earnings of $2.58 per share were essentially flat year over year but were 18.2% better than analysts had expected. Consolidated sales rose 6.3% to $2.62 billion.

Oshkosh expects full-year 2025 sales to decrease 1.4% to $10.6 billion relative to 2024. Adjusted earnings are projected to total $11.00 per share, down 6.7% year over year. The declines are attributable to lower sales in the access segment, particularly during the first half of 2025. The S&P Global consensus estimate calls for earnings growth to resume in 2026.

The company has consistently paid dividends since 2013. Prior to that, the dividend was paused in 2009 in response to the Great Recession.

The Dividend Valuation Grade for Oshkosh is B (good value). The stock’s current yield of 2.1% is above its five-year average yield of 1.6%. Oshkosh also returns capital to shareholders via share repurchases. Last quarter, the company repurchased 494,069 shares. (The company had 65.6 million shares outstanding at the end of 2024.)

Oshkosh’s Dividend Growth Grade is B (strong). In January, the company raised its dividend by 10.9%. This was the 11th consecutive double-digit percentage dividend increase by Oshkosh. The new quarterly dividend is $0.51 per share. Cash from operations keeps the growth grade from being an A. Cash outflows increased in 2024 because of an increase in taxes due. The higher tax bill was attributable to growth in 2023 pretax income.

The Dividend Strength Grade is A (very strong). Oshkosh paid out just 17.7% of earnings as dividends last year—a low percentage. Debt is very manageable with a times interest earned ratio of 9.0.

Oshkosh was selected from the DI Ideas list for its good Dividend Grades, attractive relative yield and strong dividend growth. I will discuss Oshkosh’s selection process further next week.

Dividend Pillars for OSK

Data as of 3/6/2025.

DI Holds Up Better Than the iShares Dow Jones U.S. ETF in February

The DI model portfolio’s preference for attractively valued dividend-paying stocks helped last month. The portfolio declined 0.8%. This was better than the 1.8% drop experienced by the iShares Dow Jones U.S. ETF (IYY). Growth stocks and high beta (more volatile) stocks fared particularly poorly last month.

Fourteen stocks in the DI model portfolio rose last month. Hershey Co. (HSY) was the biggest gainer, up 15.7% in response to better-than-expected fourth-quarter 2024 earnings. The rebound more than offset its January 11.9% drop.

There was a three-way tie for second place with Amgen Inc. (AMGN), Abbott Laboratories (ABT) and Cincinnati Financial Corp. (CINF) all rising 7.9%.

Ten stocks fell. Skyworks Solutions was the worst performer, plunging 24.9% in February for the reasons explained above. IDEX Corp. (IEX) and Huntington Ingalls Industries Inc. (HII) slid 13.4% and 11.0%, respectively, in response to weaker-than-expected 2025 earnings guidance. UnitedHealth Group Inc. (UNH) fell 12.4% in response to news reports of investigations into its Medicare billing practices.

The DI model portfolio’s yield at the end of February was 2.6%. This is more than double the iShares Dow Jones U.S. ETF’s yield of 1.0%. Pfizer Inc. (PFE) remained the portfolio’s highest-yielding stock with a yield of 6.4%. IDEX Corp. continued to have the lowest yield at 1.4%.

No stocks ended the month on valuation probation. However, BlackRock Inc.’s (BLK) month-end yield of 2.1% is barely above its five-year average low of 2.0%.

The Toro Co. Beats Earnings Estimates and Addresses Tariffs

The Toro Co. earned $0.65 per share on an adjusted basis during its fiscal first-quarter 2025 ended January 31, a positive surprise of 3.2% over the S&P Global consensus estimate. Rising sales of professional golf equipment offset the weakness in the residential segment related to below-average snow accumulation. The Toro Co. maintained the $4.325 per share midpoint of its fiscal-year 2025 adjusted earnings guidance. When asked about tariffs, CEO Rick Olson said the vast majority of the company’s products are made in the U.S., while some of the residential products and irrigation products are made in Mexico. Just 20% of sales are to international customers.

The Toro Co.’s report ends the fourth-quarter 2024 earnings season for the DI model portfolio. The final earnings season scorecard is 16 positive surprises, one negative surprise and seven in-line reports.

Let’s start with this week’s deets:

• Nike Inc. (NKE) has the largest proportionate allocation to cash and short-term investments among all DI companies. It also has good Dividend Grades.

• EOG Resources Inc. (EOG) and J. M. Smucker Co. (SJM) both reported positive earnings surprises, while Home Depot Inc. (HD) was in line with expectations. Home Depot also raised its dividend, though the increase was small.

The Cash Holdings of DI’s Dividend-Paying Stocks

The amount of cash on a company’s balance sheet is important to dividend-seeking investors. We want there to be enough cash to fund the quarterly payouts. However, too much cash can be a drag on profitability.

There isn’t a magic number to seek out. Cash needs differ by company. For example, Huntington Ingalls Industries Inc. (HII) needs more capital than Quest Diagnostics Inc. (DGX) because of its business model. Huntington Ingalls Industries makes military ships while Quest Diagnostics does medical testing. The former operates in a more capital-intensive business.

Still, I thought it would be interesting to look at the companies held within the DI model portfolio by how much they have allocated to cash and short-term investments. Short-term investments are those with a maturity of one year or less.

I used the same metric for this analysis that I used in writing yesterday’s Investor Update about Berkshire Hathaway: the sum of cash and short-term investments relative to total assets. Total assets provide a common denominator to base comparisons on. (I purposely avoided using equity because it is affected by decisions regarding debt.)

Nike holds the largest allocation of cash and short-term investments. Combined, they accounted for 26% of the company’s total assets as of November 2024. Nike also has one of the largest cash balances in the model portfolio at nearly $8 billion. Only Amgen Inc. (AMGN), PepsiCo Inc. (PEP) and UnitedHealth Group Inc. (UNH) have higher absolute amounts of cash—and all three have more total assets than Nike, too.

Cash and short-term investments account for 9% of total assets for the average DI company. The DI strategy is more concerned with whether the model portfolio’s companies have the cash flow to cover the dividend than with the proportionate amount of cash and short-term investments they have on their balance sheets. The Dividend Grades will spot any potential problems in this area.

Nike’s Strong Dividend Grades

Nike is a well-known company worldwide. Its primary line of business is athletic footwear, though the company also sells sports apparel and various sports-related equipment. The company’s brands are Nike, Jordan and Converse.

Nike’s revenues fell 9% during the first six months of fiscal-year 2025. Earnings per share are down 25%. Elliott Hill returned as CEO last year and is in the process of revamping the company’s strategy and processes. According to the S&P Global consensus estimate, analysts anticipate earnings to be down for all of fiscal-year 2025 before rebounding in fiscal-year 2026 and fiscal-year 2027. (Nike operates on a June-to-May fiscal year.)

Dividend investors have priced the earnings decline into the stock price. The current dividend yield of 2.0% is well above Nike’s five-year average high of 1.5%. This differential is why Nike has a Dividend Valuation Grade of A (deep value).

The five-year dividend growth rate is 11.0%. Though November 2024’s 8.3% increase was the company’s smallest dividend hike in over a decade, it was still good on an absolute basis. Nike’s Dividend Growth Grade is nonetheless B (strong) because of the decline in cash flow from operations. Cash flow from operations has been dragged down by lower earnings. We’ll be looking for this trend to be reversed as Hill’s initiatives take hold.

The stock’s Dividend Strength Grade is B (strong). The earnings payout is the weak spot here due to the decline in profitability. Nonetheless, Nike has a very strong times interest earned ratio (21.5), a reasonable amount of debt and a history of not cutting its dividend.

Nike is also on the DI Ideas list. Stocks on this list pass the quantitative filters for consideration for the actual DI portfolio.

Dividend Pillars for NKE

Data as of 2/28/2025.

Earnings News

EOG Resources gushed up a 6.6% positive surprise with fourth-quarter adjusted earnings of $2.74 per share. Though oil volumes were up year over year, the price of oil fell. This led to a decrease in year-over-year earnings.

Home Depot became the seventh company in the DI model portfolio to report earnings that were in line with analysts’ expectations. Comparable sales rose 0.8%, the first increase in two years. The company’s fiscal-year 2025 (ending January 31, 2026) guidance for adjusted earnings equates to $14.93 per share. This is below the S&P Global consensus estimate of $15.14 per share. Operating margins are forecast to decline in fiscal 2025 because of last year’s acquisition of specialty trade distribution company SRS Distribution Inc.

J.M. Smucker gave shareholders a tasty positive surprise with its adjusted earnings of $2.61 per share. Earnings were 10.1% better than the S&P Global consensus estimate. Though sales declined, gross margins widened. The $10.00 per share midpoint of J.M. Smucker’s raised adjusted earnings guidance for fiscal-year 2025 ending in April is above analysts’ expectations for $9.89 per share.

This week’s earnings improve the DI model portfolio’s fourth-quarter earnings scoreboard to 15 positive surprises, one negative surprise and seven in-line reports.

The Toro Co. (TTC) will announce its results on Thursday, March 6, and bring an end to the model portfolio’s fourth-quarter earnings season.

A Small Dividend Increase by Home Depot

The Home Depot raised its dividend by 2.2% to $2.30 per share. This is the smallest percentage increase since company started its current 15-year dividend hike streak in 2009. The current yield of 2.3% is below Home Depot’s five-year average high of 3.2% and implies a low valuation. The new dividend is payable on March 27.

As always, here are deets:

• Skimming the Form 10-K identifies key information about a company, including any notable risks related to its business or accounting practices.

• Tractor Supply’s current dividend yield matches its five-year average, but the stock has strong grades for dividend growth and strength.

• Both American States Water Co. (AWR) and Medtronic PLC (MDT) reported positive earnings surprises.

Tractor Supply’s 2024 10-K Filing

If you have ever looked at a company’s annual report, you’ve noticed two parts. The first is the glossy overview of the company. The second the Form 10-K. The 10-K is an annual filing required by the SEC. It discusses a company’s business model, outlines its risks and details its finances.

Large companies whose fiscal years align with the calendar year have mostly filed their Form 10-Ks by now. Our data provider, S&P Global Market Intelligence, pulls the financial information from them and sends it to us. We, in turn, update the data you see on our website and, of course, the Dividend Grades.

You can find the Form 10-K and other filings in the SEC’s EDGAR database.

I skim through the Form 10-K rather than read it word for word. Here are some of the things to look at.

• Business: An explanation of what the company does is provided. The level of detail varies by company. Tractor Supply gives a very good overview of its business model and operations. Livestock, equine and agriculture accounted for 26% of total sales in 2024. Companion animals (e.g., dogs and cats) accounted for 25% of sales, followed by seasonal and recreation products at 23%.

• Risk Factors: Much of this tends to be disclosures of what could happen. For instance, Tractor Supply lists “failure to protect our reputation” as the first risk factor—an obvious blanket statement intended to protect the company from lawsuits. It is the same thing with dividends: “We cannot provide any guaranty of future dividend payments or any guaranty that we will continue to repurchase our common stock pursuant to our stock repurchase program.” I gloss over the obvious risks and look for anything unusual. One such example was a potential tax problem in Brazil listed by a company I had looked at several years ago. Nothing in Tractor Supply’s risk factors seems unusual.

• Management’s Discussion of Financials and Operations: There can be more details given about the business’ results than are provided in the earnings release. I’ll go to this section if there is something on the financial statements I want more clarification on or if I’m researching a new stock.

• Auditor’s Report: You always want to see the accounting firm describe the financials as being presented fairly with no questionable assumptions. Tractor Supply passes this test.

• Notes to the Consolidated Financial Statements: If a company wants to brush over questionable accounting practices, this is where you find out. The company’s accounting policies are discussed here, and financial disclosures are given. You may also find interesting tidbits here. Tractor Supply disclosed that it paid an average of $53.02 per share to buy back its stock last year. As of the close on Thursday, February 20, 2025, the stock traded at $57.74 per share.

The fact that I did not see anything more notable about Tractor Supply is a good sign. You generally do not want to be surprised by any of the disclosures made in the Form 10-K.

Tractor Supply’s Dividend Grades

Since I am talking about Tractor Supply, let’s take an updated look at its Dividend Grades.

The stock’s Dividend Valuation Grade is C (average). Its current yield of 1.6% is even with its five-year average. This implies that Tractor Supply is fairly valued.

The Dividend Growth Grade is A (very strong). Tractor Supply’s 11.6% return on assets (ROA) for 2024 ranks in the top decile of all companies in our database. The stock’s five-year annualized dividend growth rate of 26.5% is among the strongest of all companies. I do expect the Dividend Growth Grade to weaken somewhat given the 4.5% dividend hike Tractor Supply announced last week.

The Dividend Strength Grade is B (strong). The earnings payout ratio of 43% has been rising over the past several years but is still reasonable on an absolute basis. Tractor Supply has a total-liabilities-to-total-assets ratio of 76.8%. Though high, the company’s times interest earned ratio is very strong at 26.9%. Only 6% of all companies in our database have a stronger times interest earned ratio.

Dividend Pillars for TSCO

Source: AAII Dividend Investing. Data as of 2/20/2025.

Two More Earnings Beats This Week

American States Water gushed passed expectations, beating the S&P Global consensus estimate by 18.4%. This was the third-largest positive surprise among the DI model portfolio holdings for this earnings season. Earnings were aided by the final rate decision for the company’s water utility subsidiary, Golden State Water Co. American States Water had previously said that the rate decision announced last month would have a retroactive impact on its fourth-quarter 2024 earnings.

Medtronic’s fiscal third-quarter 2025 beat of 2.2% was just big enough to qualify as a positive surprise. Adjusted gross margins widened by 50 basis points (0.5%) thanks to the company’s “efficiency programs,” higher prices and revenues attributable to more profitable products. The company reiterated its previously raised fiscal-year 2025 guidance for adjusted earnings of $5.44 to $5.50 per share. The S&P Global consensus estimate continues to hold steady at $5.454 per share.

This week’s two positive surprises improve the DI model portfolio’s fourth-quarter earnings scoreboard to 13 positive surprises, one negative surprise and six in-line reports.

Dividend News

No companies declared dividends this week.

Four model portfolio holdings will trade ex-dividend next week: Skyworks Solutions Inc. (SWKS) and Snap-on Incorporated (SNA) on Monday, February 24; Tractor Supply on Wednesday, February 26, and Huntington Ingalls Industries Inc. (HII) on Friday, February 28.

No model portfolio holdings will pay dividends next week.

Home Depot Inc. (HD) will announce its latest earnings on Tuesday, February 25, followed by J.M. Smucker Co. (SJM) and EOG Resources Inc. (EOG) on Thursday.

Before I do, here are this week’s deets:

• The AAII Dividend Screener offers you several ways to filter for attractive dividend-paying stocks.

• Cincinnati Financial Corp. (CINF) reported a very big earnings surprise; CME Group Inc. (CME) also beat the consensus estimate.

• Tractor Supply Co. (TSCO) raised its dividend, though the size of the increase was smaller than it has been in past years.

• The U.S. financial markets and the AAII office will be closed on Monday, February 17, in observance of Presidents Day.

Identifying Attractive Dividend Stocks With the Dividend Screener

The AAII Dividend Screener allows you to filter through U.S.-listed dividend-paying stocks based on the three pillars of the DI approach: valuation, growth and financial strength. The screener can be accessed on the AAII Dividend Investing website by selecting “Tools” on the menu at the top of the screen and then clicking “Dividend Screener.”

Currently, 2,049 dividend-paying stocks are included in the screener. These stocks have an indicated dividend greater than $0.00 and a dividend yield above 0%. We recently added the latter requirement to ensure that companies without a yield were excluded from the screener.

To screen for stocks, simply use the sliding bars below one or more of the three Dividend Grades. Each grade corresponds to one of the DI approach’s dividend pillars. The list of passing stocks will automatically adjust.

Let’s say that dividend strength matters most to you. You can set the Dividend Strength Grade to A. If you then require the Dividend Valuation and Dividend Growth Grades to be D or better (to weed out the weakest stocks on both measures), the universe of dividend-paying stocks is narrowed down to 269 companies.

But Wait, There’s More!

You are not limited to screening just the entire dividend stock universe. You can screen your own portfolios. Clicking on “Load Portfolio” imports the dividend-paying stocks held in any portfolio you’ve set up on AAII.com via My Portfolio. We’ve preloaded the DI model portfolio as an option.

If you prefer to look through predefined lists of ideas, click on the “Load Screens” button. This will give you the option to load the DI Ideas list, AAII dividend-oriented screens (like the Dogs of the Dow screens) or any of the other AAII Stock Screens.

Clicking on the “Select a sector” or “Select an industry” drop-down menu allows you to screen by either sector or industry. This is helpful if you want to look at, say, banks or energy sector companies. You can also use these drop-down menus to narrow down the results of another screen. The High Relative Dividend Yield screen currently identifies 33 companies. If I load the screen and then select Utilities from the sector drop-drown menu, the list of passing companies is narrowed down to seven.

For the screenshot below, I loaded the DI Ideas list into the screener. I narrowed the list to those stocks with Dividend Grades of A or B. I then sorted the results by yield, highest to lowest. (The table can be sorted by any of the column headings. Just click on the one you want to sort by.) Boise Cascade Co. (BCC), the highest-yielding stock on the DI Ideas list, will report earnings next Friday.

Finally, you can add any stock on the screener results that interests you to one of your existing My Portfolios (or a new one) by clicking on the plus sign by the ticker symbol.

Positive Earnings Surprises From Cincinnati Financial and CME Group

Both Cincinnati Financial and CME Group reported positive surprises when they announced their fourth-quarter earnings this week. This week’s results bring the DI portfolio’s fourth-quarter 2024 earnings scoreboard to 11 positive surprises, six in-line reports and one miss.

Cincinnati Financial’s non-GAAP earnings were 68.3% above analysts’ expectations. An improved combined ratio (insurance benefits paid out relative to premiums received) and higher net income contributed to the positive surprise. CEO Steve Spray expects the recent California wildfires to lead to first-quarter 2025 “pretax catastrophe losses of approximately $450 million to $525 million net of reinsurance recoveries.”

CME Group’s fourth-quarter 2024 adjusted earnings were 3.1% better than analysts expected. In the earnings conference call, the company’s executives repeatedly talked about expanding into the retail market, as they see more advisers and individual investors interested in futures contracts. When asked if CME Group has recently repurchased any of its stock, CFO Lynne Fitzpatrick explained that last year’s excess cash was spent on the recent special dividend.

Dividend News

Tractor Supply declared a regular quarterly dividend of $0.23 per share, a 4.5% increase from the prior declaration. This was the company’s smallest annual increase since it started paying dividends in 2010.

Eastman Chemical Co. (EMN), Nike Inc. (NKE) and Snap-on Incorporated (SNA) also declared quarterly dividends this week, all in line with their previous declarations.

No companies are scheduled to pay a dividend until the first week of March.

Medtronic PLC (MDT) will report earnings on Tuesday, February 18. American States Water Co. (AWR) will report on Wednesday, February 19.

Two stocks will trade ex-dividend next week: Hershey Co. (HSY) on Monday, followed by American States Water on Tuesday.

As mentioned above, the U.S. financial markets and the AAII office will be closed on Monday in observance of Presidents Day. Hopefully, you will have warmer temperatures than we will in Chicago, Illinois. The high on Monday is forecast to just be 10 degrees Fahrenheit. As our art director Annie would say, it is going to be two-pants weather!

Here are the deets:

• American States Water Co.’s (AWR) utility Golden State Water Co. allowed its stock to sidestep the utility sector’s downward volatility.

• Eastman Chemical Co. (EMN) and Quest Diagnostics Inc. (DGX) both had positive earnings surprises this week, while Tractor Supply Co. (TSCO) missed expectations.

• BlackRock Inc.’s (BLK) latest dividend increase was not large enough to quell concerns about its valuation.

The AI Fallout on Utility Stocks

Shares of several utility companies fell on Monday in reaction to China’s DeepSeek AI model running on lower-power processors. The Utilities Select Sector SPDR ETF (XLU) fell 2.3%, with many utility stocks losing far more. Constellation Energy Corp. (CEG), for example, plunged nearly 21%. (Constellation Energy is the Utilities Select Sector SPDR’s’ second-largest holding.)

American States Water was among the sector’s standouts on Monday, gaining 4.5%. A big reason is its public water utility Golden State Water. Golden State Water accounted for 72% of American States Water’s revenues during the first nine months of 2024. Electricity generation accounted for less than 7% of the company’s total revenues over the same period.

The utility companies whose stock prices were beaten down the most on Monday were those perceived as benefiting from growth in data centers. AI requires considerable energy in its current state. This has driven valuations for many utility energy companies higher.

Constellation Energy has been one such beneficiary of the AI boom. It derives its revenues from generating electricity. The company touts increasing data center usage as a growth driver in its presentations. DeepSeek poses a threat to Constellation Energy’s earnings outlook because it holds the potential for requiring less energy usage. (Whether DeepSeek is as good as advertised remains to be seen.)

Monday’s AI Sell-Off Had Differing Impacts on Utility Stocks

Five-day returns for American States Water, Constellation Energy and the Utilities Select Sector SPDR. Prices as of the close on Monday, January 27, 2025, are annotated.

Source: QuoteMedia. Data as of 1/30/2025.

American States Water and Constellation Energy are examples of how diversification exists within sectors. While the Dividend Investing (DI) strategy does not have a set limit on the number of companies from any one sector that are held within the model portfolio, consideration is given to what impact each company’s business will have on the portfolio’s overall diversification.

We cannot measure the DI model portfolio’s exposure to AI. While companies within the portfolio are seeking ways to integrate AI (e.g., Quest Diagnostics), none have described AI as having a significant impact on their revenues or earnings.

Comparing American States Water and Constellation Energy on Dividend Pillars

Since both are stocks are being discussed, it is worth comparing American States Water and Constellation Energy from a DI perspective. This is difficult to do because Constellation Energy has a limited history as a stand-alone company. It was spun off from Exelon Corp. (EXC) in 2022.

Here’s what I can tell you. Constellation Energy’s current yield of 0.5% matches its average low for 2022 and 2023. The company raised its dividend 25% last February. Constellation Energy’s Dividend Growth and Dividend Strength Grades are both B.

American States Water yields 2.4%. This yield is above the stock’s current five-year average low, implying an attractive valuation. The company has raised its dividend for 70 consecutive years. The most recent dividend increase was an 8.3% hike announced in August 2024. American States Water has a Dividend Growth Grade of A and a Dividend Strength Grade of B.

Dividend Pillars for CEG

Dividend Pillars for AWR

Source: AAII Dividend Investing. Data as of 1/29/2025.

Eastman Chemical and Quest Diagnostics Beat, While Tractor Supply Disappoints

Eastman Chemical and Quest Diagnostics both reported positive earnings surprises. Earnings for Tractor Supply were below analysts’ expectations. Guidance from the three companies was mixed.

Eastman Chemical’s fourth-quarter 2024 adjusted earnings were well above the S&P Global consensus estimate. The midpoint of the company’s 2025 guidance was a bit below expectations: $8.375 per share versus $8.464 per share. However, the range of Eastman Chemical’s guidance was wide at $8.00 to $8.75 per share. The Kingsport, Tennessee, methanolysis facility, which came online last March, is expected to add $75 million to $100 million of incremental earnings before interest, taxes, depreciation and amortization (EBITDA) this year. We estimate Eastman Chemical’s adjusted EBITDA to have been $1.4 billion in 2024.

Quest Diagnostics topped analysts’ earnings expectations by 2.3%. Operating margins widened on both a GAAP and adjusted basis. However, the $9.675 per share midpoint of the company’s full-year 2025 earnings guidance was slightly below the S&P Global consensus estimate of $9.72 per share. Quest Diagnostics expects potential downward profit margin pressure from hospitals but growth in both Medicare and autoimmune disorders.

Quest Diagnostics also raised its dividend to $0.80 per share. The increase was within the range of the previous two hikes both on an absolute basis ($0.05 per share) and on a percentage basis (6.7%).

Tractor Supply earned $0.44 per share in the fourth quarter of 2024. Earnings missed the S&P Global consensus estimate by 4.4%. The $2.16 per share midpoint of Tractor Supply’s full-year 2025 earning guidance was above the pre-earnings-release consensus estimate of $2.056 per share. CEO Hal Lawton told analysts that he anticipates “the headwinds we’ve been facing will moderate as we move through [2025].” The headwinds have included more cautious consumer spending. CFO Kurt Barton followed by saying, “our guidance does not assume any changes in tariffs at this time.”

This week’s reports bring the DI portfolio’s fourth-quarter 2024 earnings scoreboard to four beats, two in-line reports and one miss.

Dividend News

BlackRock declared a regular quarterly dividend of $5.21 per share, a 2.2% increase from the prior declaration. The increase was slightly larger than last year both on an absolute and percentage basis. Even with Friday’s hike, BlackRock’s yield of 1.9% compares to a five-year average low of 2.0%. This makes the stock’s valuation pricey. No action is being taken on the stock yet. The new dividend is payable on March 24, to shareholders of record as of March 7. The stock will trade ex-dividend on Friday, March 7.

As noted above, Quest Diagnostics raised its regular quarterly dividend. The new dividend is payable on April 21, to shareholders of record as of April 7. The stock will trade ex-dividend on Monday, April 7.

Huntington Ingalls Industries Inc. (HII) declared a regular quarterly dividend of $1.35 per share, in line with the prior declaration. The dividend is payable on March 14, to shareholders of record as of February 28. The stock will trade ex-dividend on Friday, February 28.

After the market close on Friday, January 24, J. M. Smucker Co. (SJM) declared a regular quarterly dividend of $1.08 per share, in line with the prior declaration. The dividend is payable on March 3, to shareholders of record as of February 14. The stock will trade ex-dividend on Friday, February 14.

No stocks are scheduled to trade ex-dividend or pay dividends next week.

The DI model portfolio will get a barrage of earnings reports next week. Amgen Inc. (AMGN), PepsiCo Inc. (PEP) and Pfizer Inc. (PFE) will report on Tuesday, February 4. IDEX Corp. (IEX) and Skyworks Solutions Inc. (SWKS) will report on Wednesday, February 5, followed by Huntington Ingalls Industries, Snap-on Incorporated (SNA) and Hershey Co. (HSY) on Thursday, February 6.

Let’s hope the groundhog doesn’t see his shadow on Sunday. My wife and I are planning to go out to Woodstock, Illinois, early on Sunday to see the prognostication in person. Woodstock is where the 1993 movie “Groundhog’ Day” was filmed. Hopefully, Ned Ryerson won’t want to talk to us about insurance.

First, here are the deets:

• Abbott Laboratories matched analysts’ fourth-quarter expectations. Its earnings guidance was also in line with expectations.

• Texas Instruments (TXN) beat fourth-quarter earnings expectations but issued disappointing guidance.

• Besides looking at the headline revenue and earnings numbers, I also scan through a company’s financial statements and its earnings conference call transcript.

How I Analyze Earnings Reports

Most people just look at quarterly earnings releases to see if revenues and earnings rose and whether earnings beat estimates.

Beyond these headline figures, there are many aspects of an earnings report you could dig into. A quick review can often give a lot of useful information without taking much of your time.

I personally start by looking at sales and earnings. In addition to looking for growth, I compare reported earnings to the S&P Global consensus estimate. Positive surprises are always preferred. I then scan through the financial statements by looking at how the numbers compare on a year-over-basis. (This is how I noticed the increase in Texas Instruments’ cost of revenues mentioned below.)

I also scan through the entire earnings release and then, if available, the conference call transcript. (Conference call transcriptions can be found on SeekingAlpha.com and might also be posted at the company’s investor relations website.) I particularly keep an eye out for any discussions about the dividend and any notable information regarding changes in the business or the company’s financial strength.

A DI Look at Abbott Laboratories’ Fourth-Quarter Earnings

Let’s start with the high-level summary. Abbott Laboratories earned $1.34 per share on an adjusted basis, essentially matching analysts’ expectations of $1.342 per share. The midpoint of Abbott Laboratories’ adjusted earnings guidance range of $5.05 to $5.25 per share for full-year 2025 matches the midpoint of S&P Global’s current consensus estimate of $5.155 per share. Sales are also projected to grow this year, though Abbott Laboratories will stop excluding coronavirus testing sales from its reported numbers. Coronavirus testing accounted for less than 2% of total sales in 2024.

In terms of the AAII Dividend Grades, changes in shares outstanding will impact the Dividend Valuation Grade via the shareholder yield. Abbott Laboratories’ shares outstanding were essentially flat at the end of 2024: 1.748 billion versus 1.749 billion at the end of 2023, as shown in the income statement below. So, this should only have a negligible impact.

The Dividend Growth Grade considers 12-month growth in operating cash flow and dividends. The changes in both should be easy to judge this time of year since companies are reporting full-year 2024 data.

Unfortunately, many companies do not include their cash flow statements in their earnings releases. Abbott Laboratories is one of them. Abbott Laboratories also did not include a balance sheet. We’ll have to wait for the company to file its annual Form 10-K with the U.S. Securities and Exchange Commission (SEC) to get this data. Last year’s Form 10-K was filed in mid-February. (Company filings can easily be accessed in the SEC’s EDGAR system.)

Abbott Laboratories raised its dividend last month by $0.04 to $0.59 per share and noted so in its earnings release. This was a 7.3% increase in the quarterly dividend payment. (Green arrows!)

Return on assets (ROA) also plays a role in the grade. A company’s return on assets is compared against its sector median. Though sector medians do not yet reflect full-year 2024 data, you could still easily calculate the return on assets for individual companies by dividing 2024 net income by average assets (assets for 2024 plus 2023 divided by two). Unfortunately, Abbott Laboratories also has yet to release its balance sheet. Many other companies include their latest balance sheet in the earnings release.

The Dividend Strength Grade considers earnings payout, total liabilities to total assets and times interest earned. The earnings payout ratio and times interest earned are compared against a company’s sector median.

Abbott Laboratories paid out $2.20 per share in dividends last year. Its adjusted full-year 2024 earnings were $4.67 per share. Dividing the dividends paid by the full-year earnings figure gives us an earnings payout ratio of 47%, which is reasonable on an absolute basis.

The times interest earned ratio is calculated by dividing earnings before interest and taxes (EBIT) by reported interest expense. Abbott Laboratories reported earnings before taxes of $7.0 billion and net interest expense of $215 million on its full-year 2024 income statement. Dividing $6.8 billion ($7.0 billion less $215 million) by $215 million results in a very strong ratio of 31.6.

We will see fully updated grades for Abbott Laboratories after all the company’s full-year 2024 financial data is released and added to our database.

Source: Abbott Laboratories.

Texas Instruments Beats But Issues Disappointing Guidance

Texas Instruments earned $1.30 per share, beating the S&P Global consensus estimate by 5.7%. Revenues declined. Cost of revenue rose because of lower production activity at company’s factories. Put another way, factory costs did not decline as quickly as production did. The $1.15 per share midpoint of the company’s first-quarter 2025 earnings guidance is below yesterday’s S&P Global consensus estimate of $1.216 per share.

This week’s two reports change the DI portfolio’s fourth-quarter 2024 earnings scoreboard to two beats and two in-line reports.

Dividend News

Texas Instruments will trade ex-dividend next Friday, January 31.

Three companies will make dividend payments next week: Quest Diagnostics Inc. (DGX) on Wednesday, January 29, followed by EOG Resources Inc. (EOG) and IDEX Corp. (IEX) on Friday.

Three companies will announce earnings next week: Quest Diagnostics and Tractor Supply Co. (TSCO) on Thursday, January 30, followed by Eastman Chemical Co. (EMN) on Friday.

No stocks declared dividends this week.

Before we dive in, remember that the U.S. financial markets and banks will be closed on Monday, January 20, in observance of Martin Luther King Jr. Day. The AAII office will be closed as well.

Here are this week’s deets:

• Preliminary data shows that a record dollar amount of dividends was distributed by S&P 500 index companies in 2024.

• Though the DI model portfolio switched to paper trading, it does hold one share of each stock to track the bid/ask spread and the timing of dividend payments.

• BlackRock Inc.

• (BLK) beat analysts’ earnings expectations while UnitedHealth Group Inc.

• (UNH) reported in-line results.

Answering Viewers Questions

Several questions were asked by AAII members during my DI webinar last week. Though I answered several “on air,” I share more answers with you here.

Buybacks

Stock buybacks and their impact on dividends were common topics. S&P 500 companies repurchased $918.4 billion of stock over the 12-month period ended September 2024, based on preliminary data from S&P Dow Jones Indices. This compares to $787.3 billion for the 12-month period ended September 2023.

Dividend payments totaled $616.2 billion as of last September, per S&P Dow Jones Indices. Earlier this week, First Trust Portfolios published a note estimating that, based on their preliminary data, a record $630 billion in dividends was paid by S&P 500 companies in 2024.

Dividends and buybacks can and do coexist. While I like both, I personally prefer dividends over buybacks because dividends are a commitment from the company to the shareholders.

REITs & MLPs

Real estate investment trusts (REITs) and master limit partnerships (MLPs) were also common topics. Both are excluded from the DI model portfolio for tax reasons. REIT distributions are generally taxed at ordinary income rates and not the lower qualified dividend tax rates. MLPs come with tax complexities. The DI strategy prefers to keep the model portfolio simple from a tax perspective.

REITs can be analyzed via the DI Dividend Grader. Prologis Inc. (PLD) has good dividend pillar grades, for instance. (Prologis was merely a name that came to mind—I haven’t looked closely at it.) I would encourage you to do further analysis since the financial structure of REITs is different from traditional corporations. Brad Thomas wrote a good article about the key criteria to look for in a REIT in the November 2022 AAII Journal.

DI Portfolio Management

Clarification was requested on the shift to paper trading for the DI model portfolio and other AAII portfolios. Paper trading is a common practice among investment newsletters. In addition, the change ensures that the dollars that were held within AAII’s model portfolios are available for operational needs.

The model portfolios do hold one share of each stock in a brokerage account to capture the bid/ask spread and monitor the payment date of dividends. All position sizes are determined by starting with the full dollar amount of cash that would have been available to invest had the portfolio continued as a real-money portfolio. The amount is then adjusted to reflect an amount equal to average size of all holdings. The math for calculating this is simply total portfolio value divided by 24 stocks. If the theoretical amount of available cash exceeds this number, the balance is set aside for future reinvestment.

A few subscribers asked about the former DI monthly report. When we discontinued publishing the report last summer, 400 subscribers paid to have the monthly newsletter delivered via mail. Most subscribers read the DI content online. Much of the information that was provided in the report is available on the DI website. I’ve also expanded these weekly emails to provide you with more timely information, including analysis of the stocks held in the DI model portfolio.

The First DI Earnings Reports of 2025

Fourth-quarter 2024 earnings season for companies operating on calendar years started this week. BlackRock reported a positive surprise while UnitedHealth Group was only modestly above analysts’ expectations. Including Nike Inc.’s (NKE) positive surprise last month, the DI portfolio’s fourth-quarter earnings scoreboard now stands at two beats and one in-line report.

BlackRock earned $11.93 per share on an adjusted basis, versus the S&P Global consensus estimate of $11.217 per share. Record inflows of $641 billion in investor dollars contributed to the surprise. CFO Martin Small guided for the repurchase of $1.5 billion worth of stock in 2025. Small also expects to seek board approval for a dividend increase “later this month.” Last year, BlackRock raised its dividend on January 12.

UnitedHealth Group earned $6.81 per share on an adjusted basis. The amount was 1.49% above the S&P Global estimate of $6.71 per share, which counts as an in-line result. CFO John Rex guided for a 2025 medical care ratio of 86.5%, one full percentage point higher than 2024. This ratio is the percentage of premiums paid out as claims. A combination of factors is contributing to this guidance, including higher risk scores for Medicare Advantage patients (coding intensity) and higher drug costs. Nonetheless, Rex predicted that “cash flow from operations will approach $33 billion, or 1.2 times net income.”

Dividend News

Texas Instruments (TXN) declared a regular quarterly dividend of $1.36 per share. The dividend is payable on February 11, to shareholders of record as of January 31. The stock will trade ex-dividend on Friday, January 31.

Pfizer Inc. (PFE) will trade ex-dividend on Friday, January 24.

No model portfolio holdings will pay a dividend next week.

Two stocks will report earnings next week: Abbott Laboratories (ABT) on Wednesday, January 22, and Texas Instruments on Thursday, January 23.

Finally, we hope those of you in the Los Angeles area are safe.