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.
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. [Market-Beating ‘Dividend Dogs’ ETF Gets a Big Buyer]
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.