The S&P 500 index (SNPINDEX:^GSPC) is trading near all-time highs despite a long list of economic and geopolitical risks. It isn’t unreasonable to think that a market slump could be on the way. In fact, as of this writing, tech stocks are in a funk. If that has you worried, dividend ETFs outperformed during the last bear market. But the real benefit of owning dividend ETFs in a downturn is probably emotional. Here’s why.
What history says about dividend ETFs and bear markets
Although history is all we have to go on, historical performance doesn’t predict future results. Still, during the 2022 bear market, the S&P 500 index fell 25%. During that swoon, dividend growth-focused Schwab U.S. Dividend Equity ETF (NYSEMKT:SCHD) dropped just shy of 20%. Yield-focused Vanguard High Yield Dividend ETF (NYSEMKT:VYM) and Invesco High Yield Equity Dividend Achievers ETF (NASDAQ:PEY) both fell around 18%.
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That may not sound like much protection, but all those dividend ETFs still outperformed during a bear market. However, there’s another factor to consider here. These dividend ETFs all allowed investors to focus on dividends rather than stock prices. Notably, Invesco High Yield Equity Dividend Achievers ETF pays monthly dividends, providing investors with even more distractions to help them through market storms.
Being able to ignore falling stock prices by focusing on dividends can help you stay invested. And over the very long term, just having the fortitude to stay invested has been a powerful tool for building long-term wealth. As the graph below shows, the long-term trend for the S&P 500 index, which is basically “the market”, is higher. But you have to live through the volatility if you are going to benefit.
^SPX data by YCharts
But sleeping better at night isn’t the only benefit of owning dividend ETFs in a downturn. If you reinvest dividends, you are automatically buying more of the ETFs when prices are lower. It is hard to buy when others are selling, even though Wall Street wisdom says the best time to buy is when there’s “blood in the streets.” If you set your dividend ETFs to dividend reinvest on autopilot, you can make tough contrarian buy decisions without even thinking about it.
It’s not all about stock prices
A bear market tends to result in indiscriminate selling. So even dividend ETFs are likely to fall. But if history is any guide, they may fall less than the broader market. However, the real benefit of owning dividend ETFs during a market slump is likely emotional, because you can focus on your dividend checks instead of stock prices. The history of the market shows that sleeping well at night while everyone else is running scared may be more important than you think if you are a long-term investor.
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Reuben Gregg Brewer has positions in Invesco High Yield Equity Dividend Achievers ETF and Schwab U.S. Dividend Equity ETF. The Motley Fool has positions in and recommends Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.
