Dividend ETFs May Help Cushion Market Dips

Includes: DVY, SDY, SPY, VIG, VYM
by: Tom Lydon

As the equities market stumbles on increased uncertainty surrounding the U.S. debt ceiling, investors should take another look at dividend exchange traded fund plays that help cushion dips in the market cycle.

Companies with consistent and high dividend payouts tend to be able to grow their earnings consistently, writes Conrad de Aenlle for MarketWatch.

In a market rally, investors typically look at market performance. Over the past five years, the SPDR S&P 500 ETF (NYSEARCA:SPY) produced a 68% total return. In comparison, the SPDR S&P Dividend (NYSEARCA:SDY), Vanguard Dividend Appreciation (NYSEARCA:VIG), Vanguard High Dividend Yield Index (NYSEARCA:VYM) and iShares Select Dividend (NYSEARCA:DVY) generated returns from a cumulative 54.4% to 67.8% in the last five years.

However, the dividend ETFs helped cushion investors during dips in the market cycle. Jordan Waxman, managing director of HSW Advisors, suggests that investors should begin looking at dividend plays as a market rally extends for too long and switch from offense to defense.

"Dividend-paying stocks will outperform on the downside and give you much more of a cushion," Waxman said in the article. High yields are likely to be paid out by "defensive companies that perform well during a recession. There's a lot of protection there."

For example, during the declines in the spring of 2010 and summer of 2011, dividend picks outperformed the broader market.

The Vanguard VYM ETF and iShares DVY ETF hold the highest yielding stocks in the dividend space. VYM has a 2.97% 12-month yield and DVY has a 3.3% 12-month yield.

The Vanguard VIG ETF tracks stocks that increase dividends over time. VIG comes with a 2.14% 12-month yield. Additionally, the SPDR SDY ETF tracks high-yield companies that have consistently raised dividends in the past 25 years. SDY shows a 2.55% 12-month yield.

Max Chen contributed to this article.

Full disclosure: Tom Lydon's clients own SPY and DVY.

Disclosure: I am long DVY, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.