The Nasdaq's Correction: Should You Invest in Dividend Stocks Now?

The Nasdaq Composite (NASDAQINDEX: ^IXIC) has recently experienced a significant decline, falling more than 10% from its most recent peak. This drop marks a critical threshold known as a correction, which often serves as the initial stage before a potentially larger market decline, known as a bear market. A bear market is typically defined as a 20% reduction from recent highs, and while it is uncertain that a bear market will occur, this correction level raises concern among investors.

If this downturn has you feeling anxious about your investments, it might be time to consider incorporating some dividend stocks into your portfolio. Dividend stocks generally exhibit less price volatility. Below are three exchange-traded funds (ETFs) that can help you easily diversify into dividend stocks.

Why Consider Dividend Stocks During Market Declines?

When evaluating total return from a stock, it's essential to recognize that it comprises both stock price changes and the dividends paid. While stock prices can fluctuate significantly over time, dividends tend to remain relatively stable, despite the possibility of companies cutting them in tough times. This stability can provide peace of mind during turbulent market periods, allowing investors to focus on receiving their quarterly dividend payments rather than being overly consumed by market fluctuations.

For those seeking a straightforward way to invest in dividend stocks, exchange-traded funds are a great option. By purchasing shares of an ETF, you can effectively buy a diversified selection of dividend stocks in one transaction, making it a more convenient choice than individually selecting stocks. As the Nasdaq navigates correction territory, consider these three ETFs to enhance your portfolio's dividend exposure:

1. Schwab U.S. Dividend Equity ETF

The Schwab U.S. Dividend Equity ETF (SCHD) is an excellent choice for many investors. Currently, it offers an appealing dividend yield of approximately 3.5%. Its strength lies in the meticulous selection process of its holdings.

The ETF begins with a focus on companies that have consistently raised their dividends for at least ten consecutive years and excludes real estate investment trusts from consideration. Next, a composite score is calculated based on factors like cash flow to total debt, return on equity, dividend yield, and five-year dividend growth rate. The top 100 companies with the highest scores are then included in the ETF, weighted by their market capitalization. The overall cost for this solid investment strategy is a low expense ratio of just 0.06%. Thus, investors are buying high-quality, financially strong, and growing dividend stocks.

2. Vanguard High Dividend Yield ETF

For those who prefer a more diversified approach, the Vanguard High Dividend Yield ETF (VYM) may be a suitable option. Unlike the Schwab ETF with its limited 100 holdings, this Vanguard ETF includes over 500 stocks. Its construction method involves selecting the highest-yielding half of all dividend-paying stocks from U.S. exchanges, with holdings weighted by market capitalization.

However, it is important to note that this broader diversification results in a more modest dividend yield of around 2.6%. While gaining the benefits of diversification, such a strategy often pulls the yield down. This ETF also keeps its expenses low, matching the Schwab ETF at a 0.06% expense ratio. Although it didn't perform as robustly as the Schwab ETF during the most recent Nasdaq correction, it still outperformed the broader index.

3. Global X SuperDividend U.S. ETF

If you're looking for a more conservative investment, consider the Global X SuperDividend U.S. ETF (DIV). During the recent downturn, this ETF displayed impressive stability. While Schwab ETF saw gains and Vanguard ETF had modest losses, the Global X ETF barely moved at all – a compelling trait for cautious investors.

Global X begins its selection by identifying stocks with a beta of 0.85 or less, indicating reduced volatility compared to the market. Next, it eliminates stocks with dividend yields under 1% or over 20%, as well as those with cut dividends exceeding 50%. Ultimately, the 50 stocks with the highest remaining yields are selected and weighted equally. While the Global X SuperDividend U.S. ETF has had lackluster long-term performance, its design may suit investors seeking steadiness during market turmoil. The expense ratio is a bit higher at 0.45%, but it boasts a dividend yield of 5.4%, the highest among the three options mentioned.

Conclusion: Finding the Right ETF for Your Needs

Each of these ETFs presents unique characteristics suited for different investor priorities. The Global X SuperDividend U.S. ETF is ideal for those seeking lower volatility, despite its higher costs and average long-term returns. The Vanguard High Dividend Yield ETF is focused on broad diversification, which may appeal to investors during volatile times. However, the standout choice so far during the Nasdaq correction has been the Schwab U.S. Dividend Equity ETF, which has performed well while providing a balanced yield. If current market conditions are causing you concern, the Schwab ETF may be the most appealing option of the three.

Author has no positions in the mentioned stocks. The financial institution mentioned in this article may hold positions in the discussed ETFs.

Nasdaq, Dividend, ETFs