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3 Ways Dividend Stocks Can Help You Survive a Stock Market Crash

By Maurie Backman - Feb 22, 2021 at 5:49AM

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Here's why dividend stocks are a good bet for periods of market volatility.

Will the stock market crash this year? We really don't know.

What we do know is that stocks are largely overvalued right now, and that there's reason to expect volatility in the coming months. A slower than expected vaccine rollout, coronavirus surges, and spiking jobless claims could impact the stock market in a very meaningful way. As such, it's a good idea for investors to brace for the possibility of a stock market crash and do their part to prepare for it. That means loading up on emergency savings and making sure they're invested appropriately given the potential for a near-term decline. And with regard to the latter, dividend stocks are actually a pretty good bet. Here's why.

1. You'll have income coming in even when stock values are down

When stock values tumble, it's important to have cash on hand. The reason? If you're forced to liquidate stocks when they're down, you'll lock in losses. If you leave your investments alone, you may not lose a dime. The good thing about dividend stocks is that they generally keep paying consistently even when the market is down, so if you need money, you can use your dividend payments as an income source instead of reinvesting them. That could, in turn, allow you to keep your portfolio untapped.

Ripped dollar bill with the word dividends where there's a hole

Image source: Getty Images.

2. You'll feel less stressed

There's something about the knowledge that you have money coming in that can make a stock market crash easier to deal with mentally. When you're stressed, you're more likely to make poor, rash decisions that cost you money, but when you're operating from a place of having peace of mind, you're more likely to make smart ones.

3. You may experience less volatility in your portfolio

Companies that pay dividends consistently are also companies that tend to have staying power. As such, you may find that even if the market crashes, your dividend stocks do a better job of retaining their value.

How to find the right dividend stocks

There are several thousand dividend stocks you can choose to invest in, so how do you pick the right ones? Obviously, you can look at dividend yield -- the amount of money a company pays out in dividends relative to its share price. But a better bet may be to focus on what are known as dividend aristocrats -- S&P 500 companies that have not only consistently paid dividends for at least 25 years, but have increased them. There are several dozen companies that bear this distinction, so you can have a look and choose the ones that best align with your investing strategy (and your stock-buying budget, of course).

We don't know when the next stock market crash will happen, but if you invest in dividend stocks, you may not have to worry about it quite as much. Of course, it pays to hold dividend stocks even when you don't think a crash is imminent, but if you're worried that stock values are about to take a massive hit, dividend stocks are a really solid backup plan.

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