As risk-off trends, a focus on dividends

Bottom line up top:

Oil turmoil spills over in a treacherous two weeks for risk assets. March roared in like a particularly threatening lion, with surprise military strikes against Iran on the last day of February igniting both a geopolitical and economic storm. The conflict disrupted shipping through the narrow Strait of Hormuz, causing energy prices to soar, equity markets to tumble and bond yields to surge. In some recent trading sessions, crude oil prices hit or exceeded the $100 per barrel threshold, underscoring how sensitive global energy markets remain to geopolitical risk. For the broader global economy, higher oil prices simultaneously act as a tax on consumers while reviving inflation angst just as disinflationary trends had appeared to be gaining traction. Figure 1 shows our own expectations for how higher oil prices might affect U.S. inflation and economic growth.

Last week's release of the Consumer Price Index (CPI) for February was in line with expectations at 0.3% for the month and a tad cooler than forecast at 2.4% year over year. But this snapshot of moderation was taken before the Persian Gulf hostilities began. The delayed release of January's Personal Consumption Expenditures (PCE) Price Index provided a view of inflation that was even more dated, and less favorable than CPI: It showed core PCE (the Federal Reserve's preferred inflation barometer) rising to 3.1% year over year — higher than consensus forecasts and the prior month's reading. Another backward-looking but potential factor in assessing the state of the economy as the Fed weighs its policy options was U.S. fourth quarter GDP growth, which was revised downward last week to a modest +0.7% from the initial +1.8% estimate.

Out like a lamb? Hope springs eternal. Investors wishing to chart a clearer and calmer path forward may find it tough going amid the continuing crisis in the Middle East, but this week's economic calendar could offer some meaningful clues about the trajectory of inflation (February's Producer Price Index) and economic growth (primarily manufacturing and housing market indicators). Overall, the current environment reinforces three key themes: (1) geopolitical risk is often an underappreciated driver of macroeconomic volatility; (2) inflation dynamics — especially those tied to energy prices — continue to complicate central bank policy expectations, as we'll likely see when the Fed meets on Wednesday; and (3) equity valuations remain elevated enough that markets are increasingly sensitive to changes in growth, inflation and interest rate assumptions.

Against this backdrop, investors may want to take a closer look at U.S. dividend growth stocks, which historically have proved relatively more defensive in the face of heightened volatility.

Portfolio considerations

After lagging the broader three-year U.S. equity market rally fueled by the risk-on, AI-driven boom, dividend-paying stocks (and, more importantly, dividend growers) have outpaced both the S&P 500 Index and growth-oriented equity benchmarks. We expect this trend could continue. And with elevated market volatility and uncertainty at the forefront for investors, now may be an opportune time to consider dividend growers as a core building block of a portfolio's equity allocation.

Dividend growth stocks have historically offered an attractive profile, combining strong potential earnings and cash flows, healthy balance sheets and sustainable dividend policies. These characteristics have enabled dividend growers to deliver compelling returns in rising markets while providing defensive qualities to mitigate risk during periods of heightened volatility and market drawdowns (Figure 2).

Additionally, the steady income generated by dividends can serve as an essential complement to a strong capital appreciation strategy, helping limit variability, offset inflationary pressures, cushion the effect of higher interest rates and contribute meaningfully to total return over time. While market volatility can cause portfolio values to fluctuate widely, history shows that companies with balance sheet discipline and the financial strength needed to sustain and grow their dividends have often been able to temper those impacts.

Continued geopolitical tensions, concerns about labor market softening and AI overinvestment, and still-sticky core inflation make the case for prioritizing high-quality companies with strong capital flexibility and a commitment to growing dividends.

We remain confident that such companies are well-positioned to maintain attractive dividend growth rates in 2026. Corporate balance sheets are sound, cash levels are elevated and dividend payout ratios — still below long-term averages — have room to grow. Lastly, per FactSet, consensus estimates call for S&P 500 earnings per share growth of approximately 15% for the year ahead — robust results in which dividend growth stocks are poised to participate.

Nuveen's Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.

Regular meetings of the GIC lead to published outlooks that offer:

• macro and asset class views that gain consensus among our investors
• insights from thematic “deep dive” discussions by the GIC and guest experts (markets, risk, geopolitics, demographics, etc.)
• guidance on how to turn our insights into action via regular commentary and communications