Dividend stocks generate passive income even when the market is falling.
With the S&P 500 (^GSPC +0.81%) down just 1% from its all-time high, the stock market isn’t remotely in crash mode. But cracks are beginning to form.
The tech-heavy Nasdaq Composite (^IXIC +1.26%) is down 4.5% from its all-time high, while massively influential companies like Nvidia, Alphabet, Apple, Microsoft (MSFT +3.00%), Amazon, Broadcom, Meta Platforms, and Tesla are down between 7.6% and 26.7% from their all-time highs.
The S&P 500 would be down a lot more if it weren’t for standout performances from sectors like industrials, energy, consumer staples, utilities, and materials.
Here are three ways you can use dividend stocks to position your portfolio for a broader market pullback.
Image source: Getty Images.
Dividend Kings
Perhaps the most straightforward way to prepare for a stock market sell-off is to anchor your portfolio with companies that have ultra-reliable track records for boosting their payouts.
Companies like Coca-Cola (KO 0.33%) and PepsiCo (PEP 0.21%) have increased their dividends annually for over 50 consecutive years — making them Dividend Kings. Demand for their products tends to hold up no matter what the economy is doing, which allows them to steadily grow earnings and cash flow (and, in turn, their dividends) — even during economic contractions.
Investors buying reliable Dividend Kings can expect the yield on their initial investment to grow over time. For example, Coke just raised its dividend by 4% to $2.12 per share per year, marking its 64th consecutive annual increase. Investors buying one share for around $80 at the time of this writing can expect a yield of around 2.6%, but if Coke continues to raise its dividend year after year, that initial $80 investment could produce a lot more passive income in the future.
The downside of buying Dividend Kings like Coke and PepsiCo now is that their valuations have gotten more expensive because investors have already flocked to these stocks amid market uncertainty. However, investors who don’t mind paying a premium price for reliability may still want to take a closer look at Dividend Kings.
Today’s Change
(-0.33%) $-0.27
Current Price
$80.45
Key Data Points
Market Cap
$347B
Day’s Range
$79.56 – $80.69
52wk Range
$65.35 – $81.09
Volume
642K
Avg Vol
18M
Gross Margin
61.75%
Dividend Yield
2.53%
Dividend-paying growth stocks
An out-of-the-box way to buy dividend stocks into a potential market crash is to go with quality growth stocks with reasonable valuations. Take Microsoft, for example. Microsoft sports a forward price-to-earnings ratio practically identical to the S&P 500. It also features a 0.9% dividend yield, which is close to the S&P 500’s 1.1% yield.
But Microsoft is a far better company than the typical S&P 500 component by just about any category — whether that’s operating margins, free-cash-flow generation, dividend growth rate, a rock-solid balance sheet, industry leadership, etc.
So while investors may naturally gravitate toward ultra-safe stocks like Coke and PepsiCo, Microsoft may be an even better buy for long-term investors who care more about potential total return than passive income alone.
Schwab U.S. Dividend Equity ETF
Today’s Change
(-0.41%) $-0.13
Current Price
$31.51
Key Data Points
Day’s Range
$31.28 – $31.66
52wk Range
$23.87 – $31.88
Volume
22M
Dividend-paying ETFs
Another strategy is to go with an exchange-traded fund (ETF) like the Schwab U.S. Dividend Equity ETF (SCHD 0.41%). The fund is chock-full of Divided Kings (Coke and Pepsi are both top-10 holdings). But no holding makes up more than 5% of the fund, making it a solid choice for investors who prioritize diversification.
The fund yields 3.5%, which is more than most Dividend Kings pay. The fund achieves that high yield by including some ultra-high-yield stocks, such as telecom players, tobacco companies, and stodgy healthcare companies.
Investing in ETFs with high yields and balanced holdings is a good way to generate passive income and protect your portfolio from a crash, especially if a handful of correlated holdings sell off. And with a mere 0.06% expense ratio, investors can rest easy knowing they aren’t incurring high fees for the fund’s services.
