The Nasdaq Composite (^IXIC +2.02%) has fallen more than 10% from a recent high. That's a key level known as a correction, which is the first stop as Wall Street heads toward a bear market. A bear market -- a 20% drop from recent highs -- is not guaranteed to happen, but this is why investors get so worried about a 10% market decline.
If this drop has you worried, perhaps it is time to add some dividend stocks into your portfolio mix as they can be less volatile. Here are three different options for doing that quickly and easily, all of which are broadly diversified exchange-traded funds (ETFs).
Why buy dividend stocks in a downturn?
Total return is the combination of stock price appreciation (or depreciation) and the dividends the stock pays. Price goes up and down, but dividends tend to be fairly constant over time, though companies do cut them when they need to. That makes dividends something of a salve for the mind when markets get volatile. You can refocus your attention on your quarterly dividend checks if watching the market's gyrations is keeping you up at night.
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If you are looking for something to sooth your nerves, you have an easy option for doing it: exchange-traded funds. By buying shares of an ETF, you are, basically, getting an entire portfolio of dividend stocks with one simple trade. That's much quicker and easier than trying to cherry-pick stocks one by one. If your portfolio is lacking dividend stocks as the Nasdaq plays in correction territory, here are three ETFs that can quickly change the situation.
1. Schwab U.S. Dividend Equity ETF
Schwab U.S. Dividend Equity ETF (SCHD 0.06%) is a strong choice for most investors. It offers an attractive 3.5% dividend yield today, but it is the way in which the portfolio is created that really shines.
The first step of the process is looking only at stocks that have increased their dividend annually for 10 consecutive years (real estate investment trusts are removed from consideration). Then a composite score is generated, looking at cash flow to total debt, return on equity, dividend yield, and a company's five-year dividend growth rate. The 100 companies with the highest composite scores are included in the ETF and weighted by market cap. The price tag for all of this work is a modest 0.06% expense ratio.
But the real story is that, like what you would probably do if you bought stocks one by one, this ETF is buying financially strong and growing dividend stocks.
2. Vanguard High Dividend Yield ETF
For investors that prefer a more diversified approach, Vanguard High Dividend Yield ETF (VYM +0.40%) might be the right choice. Unlike the Schwab ETF, with just 100 holdings, this Vanguard ETF has over 500 stocks in it. That is driven by a very simple construction approach that takes the highest yielding half of all stocks that pay dividends on the U.S. exchanges. The holdings are market-cap-weighted.
There is one major side effect of this approach that's important to note. The dividend yield is a somewhat modest 2.6%. Diversification has benefits, but when you buy so many stocks, you are inherently forced down the yield spectrum.
And, notably, this ETF's simple approach costs just as much as Schwab's more surgical selection process, 0.06%. It hasn't held up quite as well as Schwab U.S. Dividend Equity ETF during the Nasdaq's most recent correction, but it is holding up better than that index.
3. Global X SuperDividend U.S. ETF
If what you really want is a rock to hide under, Global X SuperDividend U.S. ETF (DIV 0.36%) might be your cup of tea. As the graphs above show, the Schwab ETF rose as the Nasdaq fell over the past month. The Vanguard ETF fell less than the Nasdaq. And, as the chart below shows, Global X SuperDividend U.S. ETF did... virtually nothing at all. That actually makes a lot of sense.
Global X SuperDividend U.S. ETF starts its selection process by looking only at stocks with betas equal to or lower than 0.85. Beta is a measure of volatility relative to the broader market. A beta below 1 suggests a stock is less volatile than the market. From this list it eliminates stocks with dividend yields below 1% or above 20% and those that have cut their dividends by more than 50%. After the final culling, the 50 stocks with the highest dividend yields are selected. An equal weight methodology is used.
Over the long term, Global X SuperDividend U.S. ETF's performance hasn't been great, but its low-beta design could be the perfect answer for investors trying to find calm during a storm. The expense ratio is 0.45%, which is actually fairly expensive for an ETF. However, the dividend yield is 5.4%, the highest on this list.
Three options, but one will likely be the standout for most investors
Global X SuperDividend U.S. ETF is built to be boring, which might interest some investors despite its high expenses and middling longer-term performance. Vanguard High Dividend Yield ETF is all about diversification, something that some investors might desire in times of turbulence. But the real standout during the Nasdaq's correction so far has been Schwab U.S. Dividend Equity ETF, which has gained ground as the market has fallen. And it offers a reasonable middle ground on the yield front. If today's market turmoil has you worried, it might be the best option of the three.
