The Nasdaq Enters Correction Territory: Should You Consider Dividend Stocks?

The Nasdaq Composite (^IXIC) has recently dropped over 10% from its peak. This level, known as a correction, often raises concerns for investors as it can be the initial stage before a bear market. A bear market, defined as a 20% decline from recent highs, isn't definite, but it highlights why many investors worry when the market falls by 10%.

If you find this downturn troubling, it might be wise to explore adding dividend stocks to your portfolio. Dividend stocks typically exhibit less volatility than growth stocks, making them a more stable investment option during turbulent market conditions. Here are three exchange-traded funds (ETFs) that offer quick and easy methods to invest in dividend stocks.

Why Invest in Dividend Stocks During Market Declines?

The total return on a stock consists of both its price appreciation and the dividends it pays to shareholders. While stock prices can fluctuate widely, dividends tend to remain reasonably stable, providing a sense of security to investors. When market volatility makes you anxious, focusing on the dividends you receive can be a helpful distraction.

For those looking to alleviate their investment fears, buying ETFs is a convenient solution. By purchasing shares of an ETF, you essentially acquire a diversified portfolio of dividend stocks with a single transaction. This approach is not only more efficient than selecting individual stocks, but it also allows you to quickly enhance your portfolio with dividend-paying investments.

1. Schwab U.S. Dividend Equity ETF

The Schwab U.S. Dividend Equity ETF (SCHD) stands out as a solid choice for investors. Currently, it offers an attractive dividend yield of about 3.5%. However, what truly sets this ETF apart is its selection process.

The ETF begins by considering only those companies that have consistently raised their dividends for at least 10 years, excluding real estate investment trusts. Next, it generates a composite score based on various factors such as cash flow, debt levels, return on equity, dividend yield, and five-year dividend growth rates. The top 100 companies with the highest scores are then included in the ETF, weighted by their market capitalization. This entire process comes at a low expense ratio of just 0.06%.

Ultimately, this ETF focuses on acquiring financially sound companies that are also growing their dividends.

2. Vanguard High Dividend Yield ETF

For those seeking a more diversified option, the Vanguard High Dividend Yield ETF (VYM) may be more suitable. Unlike the Schwab ETF, which holds around 100 stocks, this Vanguard fund encompasses over 500 stocks. Its straightforward construction method selects the highest-yielding half of dividend-paying stocks from U.S. exchanges, and it also employs market-cap weighting.

However, one downside to this diversified approach is that the dividend yield is a somewhat lower 2.6%. While diversification has its advantages, holding such a vast number of stocks may dilute the yield you receive.

Interestingly, both this Vanguard ETF and Schwab's ETF share the same expense ratio of 0.06%. While it has not performed as strongly as Schwab's offering in the recent correction, it has still outperformed the Nasdaq index.

3. Global X SuperDividend U.S. ETF

If you are looking for a more defensive investment, the Global X SuperDividend U.S. ETF (DIV) might align with your goals. As indicated by recent data, while the Schwab ETF gained ground during the Nasdaq's downturn, the Vanguard ETF experienced a smaller decline, and the Global X SuperDividend U.S. ETF showed minimal movement overall. This stability makes sense.

This ETF begins its selection process by filtering for stocks that have a beta of 0.85 or lower, indicating less volatility compared to the broader market. Stocks with dividend yields under 1% or exceeding 20% are excluded, along with those that have significantly decreased their dividends. After these steps, the ETF selects the 50 stocks with the highest dividend yields using an equal-weight methodology.

While the long-term performance of the Global X SuperDividend U.S. ETF may not be remarkable, its low-beta strategy may prove appealing for investors looking to avoid dramatic fluctuations in their portfolios. The expense ratio for this ETF is 0.45%, which is higher than the previous two options, but it boasts a dividend yield of 5.4%, the highest among the three funds discussed.

Conclusion: Find the Right Dividend ETF for You

While the Global X SuperDividend U.S. ETF caters to those who prefer stability, Vanguard's approach provides broad diversification. However, the standout performer amid the Nasdaq's correction has been the Schwab U.S. Dividend Equity ETF, which has shown positive movement in the face of market declines and offers a reasonable yield. If you’re feeling uneasy about current market conditions, the Schwab ETF may be the best fit for your needs.

Note: Financial decisions should be made based on your risk tolerance and investment goals. Always consider seeking advice from a financial professional.

Nasdaq, Dividend, ETFs