It may be hard to believe now, but seven months ago, the stock market began what would be one of the quickest and most violent stock corrections we've witnessed since the Great Depression.
Beginning on Jan. 26, and extending for the next 13 calendar days, the Dow Jones Industrial Average (DJINDICES:^DJI), S&P 500 (SNPINDEX:^GSPC), and Nasdaq Composite were thrown for a loop. All three closely followed indexes shed more than 10% of their value in what amounts to the blink of an eye.
To say that investors were panicked during the first week of February would be an understatement. The iconic Dow logged four of its nine largest single-day point declines in history, including an intraday swoon that approached nearly 1,600 points on Feb. 5. Meanwhile, the Volatility Index soared to its highest reading since 2009, which was during the height of the Great Recession.
All the while, investors ran for cover. Data from Thomson Reuters' Lipper unit showed that $23.9 billion was withdrawn by investors from stock funds during the week of Feb. 9. This marked the largest cash outflow in history from stock funds since Lipper began tracking weekly fund inflows and outflows in 1992.
Buy-and-hold investors are batting 1.000 over the long run
And yet, something amazing happened this past Tuesday, Aug. 21. In mid-afternoon trading, the broad-based S&P 500, which is the index of the three that's most reflective of the health of the U.S. economy and stock market, inched and clawed its way to a brand-new intraday high of 2,873.23. Though this new all-time high only eclipsed the S&P 500's previous record by just 0.36 points, it nonetheless perpetuates a pattern that predates every living person on this planet. Namely, the fact that the stock market tends to increase in value over time.
According to stock market analytics firm Yardeni Research, there have been 36 stock market corrections of at least 10% in the S&P 500 since 1950, and 52 over the last 90 years. In other words, stock market corrections are actually quite common, with an occurrence rate of once every 1.73 years over the last nine decades. Yet when they hit, Wall Street and retail investors often seem surprised.
But in reality, investors should be excited when corrections strike, because they offer what's historically been a guaranteed way to make money over the long run.
You see, following each and every correction the S&P 500 has undergone since 1950, a bull market rally has eventually erased the entirety of the decline. And in 22 out of the 36 corrections since 1950, it's taken less than 105 days for the stock market to find the bottom.
Put in another context, buy-and-hold investors are a perfect 36-for-36 since 1950, regardless of where they initially bought into the S&P 500. The only factor that mattered as to whether their initial investment appreciated in value was time.
With time on your side, this ETF offers a smart way to consistently come out a winner
Based on the data above, if you were to buy into the SPDR S&P 500 ETF (NYSEMKT:SPY) and hang on for a long period of time, you should net a handsome return on your initial investment. Again, while nothing can ever be 100% guaranteed with the stock market, long-term investors who bet on the S&P 500 via the SPDR S&P 500 ETF have a perfect batting average over the long run.
But if you want something more than simply an exchange-traded fund (ETF) that closely tracks the movement of the S&P 500, then I'd opine that the SPDR S&P Dividend ETF (NYSEMKT:SDY) is the way to go.
Why the SPDR S&P Dividend ETF? The simply answer lies in the name: dividend.
Dividend stocks offer four advantages that buy-and-hold investors should come to appreciate. First, they act as a beacon to investors of time-tested, profitable business models. A company isn't going to continue to share profits with investors if it doesn't foresee growth and ongoing profitability in the future.
Secondly, dividend payouts act like a hedge against inevitable stock market corrections. Sure, a payout of say 2% or 3% annually isn't going to offset a 10% decline in the value of your portfolio, but it sure does take the sting off what's usually a short-term move lower in the market.
Third, dividend stocks have historically run circles around their nondividend-paying counterparts over the long run. Though most S&P 500 components do pay a dividend, not all of them do. Consider the SPDR S&P Dividend ETF a way of weeding out some potential underperformers since its benchmark is the High Yield Dividend Aristocrats Index.
And lastly, reinvesting your dividend(s) back into more share of this ETF (or dividend-paying stock) gives you a smart way to quickly compound your wealth. It's the same not-so-secret trick that high-profile money managers use to increase their clients' wealth.
Although the SPDR S&P Dividend ETF does have a net expenses ratio (0.35%) that's almost quadruple that of the SPDR S&P 500 ETF (0.09%), its yield of 2.36% is also notably higher than that of the SPDR S&P 500 ETF at 1.75%.
All in all, the SPDR S&P Dividend ETF appears to be a guaranteed way to make money, and perhaps even outperform the S&P 500, as long as you allow the variable of time to work in your favor.