Why Dividend Growth—Not Just Yield—Matters in 2025
In the world of income investing, it’s tempting to chase the highest-yielding stocks. But experienced investors know that the true path to long-term wealth isn’t simply locking in a big yield today—it’s owning dividend stocks whose payouts grow reliably year after year. Companies that consistently increase dividends, backed by strong cash flow and disciplined capital management, are more likely to deliver sustainable returns than businesses offering temporarily inflated yields.
In an environment shaped by higher interest rates, evolving market volatility, and growing demand for stable income, dividend-growth stocks are emerging as some of the most compelling opportunities. Recently, Wolfe Research highlighted two standout large-cap companies with proven dividend expansion, strong balance sheets, and promising long-term fundamentals: Merck & Co. (MRK) and Qualcomm (QCOM).
These two firms don’t top the yield charts, but they offer something much more valuable:
the ability to pay investors more every single year.
Below is a deep, expanded look at why these two dividend growth machines remain top buys for income-focused investors in 2025 and beyond.
Dividend Stock #1: Merck & Co. (MRK)
A Pharma Powerhouse With Decades of Stability and Room for Dividend Expansion
Founded in 1891, Merck & Co. has become one of the world’s most respected pharmaceutical companies, known for life-saving treatments such as:
- Keytruda – the blockbuster immunotherapy drug driving billions in annual revenue
- Gardasil – a leading HPV vaccine
- A growing portfolio in oncology, immunology, and animal health
Today, the company commands a massive $235 billion market cap and remains a cornerstone for dividend-focused investors seeking a blend of stability and long-term growth.
Merck’s Stock Is Rebounding Strongly in 2025
After a challenging first half of 2025, Merck staged a strong comeback—rising about 29% over the past six months, significantly outperforming its sector’s 14% median return. This surge was fueled by:
- Record-setting Keytruda sales
- Improving earnings growth
- Positive analyst sentiment
- Strong operational momentum across its therapeutic areas
As healthcare stocks regain their footing, Merck stands out as a defensive name with offensive growth potential.
Attractive Valuation and a Strong 3.4% Dividend Yield
From a value perspective, Merck offers one of the most compelling profiles in the pharma sector:
- Forward P/E ratio: ~10
(sector median ~19 – meaning MRK trades at a major discount) - Dividend yield: ~3.4%
(more than double the sector median) - Payout ratio: ~42%
(leaves substantial room for future dividend hikes)
Unlike high-yield stocks that may struggle to raise payouts, Merck has ample earnings coverage to continue rewarding investors.
A Proven Track Record of Dividend Growth
Merck is becoming a reliable dividend-growth leader. Consider:
- Dividend raised every year since 2021
- Board recently approved a new $0.85 dividend for Q1 2026, up from $0.81
- Dividends have grown ~38% over the last five years
This kind of steady, disciplined growth is exactly what long-term income investors seek.
Financial Strength: Expanding Earnings and Free Cash Flow
Wall Street sees steady growth ahead:
- Expected 20% forward EPS growth, well above industry averages
- Strong free cash flow supporting R&D investment and shareholder returns
- Improving profitability despite industry-wide challenges
Free cash flow is the lifeblood of dividend stability—and Merck is producing plenty of it.
Strategic Moves Enhance Long-Term Growth
Merck continues to evolve beyond its legacy franchises:
- Cidara Therapeutics acquisition ($9.2B) strengthens its antiviral pipeline
- New drugs like Winrevair saw significant revenue increases in Q3 2025
- Expanding animal-health and immunology portfolios add diversification
These moves help buffer Merck against patent cliffs and ensure ongoing revenue strength well into the next decade.
Analyst Outlook: Moderate Buy With Upside Potential
Analysts rate MRK a “Moderate Buy”, with a consensus price target of $103.09—about 4% upside. While modest, this target does not fully account for the value of Merck’s expanding pipeline or its consistent dividend increases, which often drive long-term returns more than price appreciation alone.
Dividend Stock #2: Qualcomm (QCOM)
A Cash-Rich Tech Giant Positioned for the Next Wave of Connectivity and On-Device AI
Founded in 1985, Qualcomm is a foundational player in global wireless technology. Its products power:
- Smartphones
- Connected vehicles
- IoT devices
- Emerging AI-driven edge computing
With a $178 billion valuation, Qualcomm is an innovation leader deeply embedded in global 5G and AI infrastructure.
Stock Performance: Volatile but Strengthening
2025 has been a bumpy ride for Qualcomm shares:
- Hit a 52-week high in late October
- Sold off amid broader semiconductor weakness and AI bubble concerns
- Still up about 5% YTD
Short-term volatility aside, Qualcomm continues posting resilient operational results.
A Growing Dividend Backed by Major Cash Flow
Qualcomm’s dividend yield of ~2.18% may seem modest, but the company excels where it matters:
Five-year dividend growth: ~37%
- 2024 dividend raised from $0.80 → $0.85
- 2025 raised again to $0.89
Payout ratio: ~34%
Low enough to support future increases AND invest in growth.
Record cash flow: $12.8 billion in FY 2025
The company returned $3.8 billion to shareholders in Q3 alone.
This is the signature of a dividend stock built for long-term compounding.
Expanding Beyond Mobile: Qualcomm’s AI and Data Center Push
One of the most exciting growth avenues is Qualcomm’s leap into AI data center chips, including:
- AI200 and AI250 chip families
- Expanding automotive partnerships
- On-device AI processing for mobile and edge computing
These new revenue streams are expected to meaningfully scale by FY 2027, reducing dependence on cyclical smartphone demand.
Undervalued vs. Tech Peers With Meaningful Upside
From a valuation standpoint:
- Forward P/E: ~15x, well below AI competitors
- Significant room for re-rating as on-device AI grows
- J.P. Morgan recently raised its target to $210
Analysts rate QCOM a “Moderate Buy”, with a consensus target of $191.09—implying 16% upside.
Two Dividend Stocks Built for Long-Term Income and Growth
Merck and Qualcomm represent two distinct but equally compelling income opportunities:
- Merck delivers stable, defensive growth backed by massive cash flow and expanding global pharmaceutical demand.
- Qualcomm offers tech-driven growth, a rapidly rising dividend, and new AI-centric revenue opportunities that could supercharge future payouts.
Both stocks boast:
- Strong free cash flow
- Conservative payout ratios
- Consistent multi-year dividend growth
- Attractive valuations
- Durable competitive advantages
For investors seeking dividend stocks with both reliable income and long-term upside, MRK and QCOM stand out as high-quality candidates with promising futures.