By Lawrence C. Strauss
After three straight years of double-digit returns for the S&P 500, dividend investors should consider some ways to give their portfolios more downside protection.
One possibility is to hold one or several defensive-focused dividend exchange-traded funds.
Dan Sotiroff, a senior analyst at Morningstar, says that it's a good time of the year for investors to look at their portfolios and reassess their allocations, especially after a massive run-up in the stock market.
There's certainly plenty to be concerned about as 2026 begins, including weaker job growth and pricey stock valuations.
"No way to sugarcoat it: The S&P 500 is expensive," BofA Securities wrote in a Dec. 31 research note. While the bank's analysts do see some pockets of opportunity, they are "less enthusiastic than most," with a year-end target of 7100 for the S&P 500.
That would amount to a roughly 2% price increase for the index this year, based on recent levels.
What's more, 2025 marked the third straight year of double-digit gains for the S&P 500. A fourth consecutive year of these results isn't guaranteed -- far from it.
Of course, more-defensive dividend ETFs aren't always a panacea in a down market.
"While divided ETFs would certainly cushion the blow, bear markets have a way of taking no prisoners," says Paul Hickey, co-founder of Bespoke Investment Group.
He points out that in 2022, the last year in which stock indexes saw significant price declines, most dividend ETFs slid -- but not as much as the overall market did.
Dividends no doubt helped cushion some of the blow. The S&P 500 returned minus 18% that year, including dividends. Based on prices alone, the index was down 19.4%.
One dividend fund with some notable defensive traits is the $73 billion Schwab U.S. Dividend Equity ETF. The index the fund tracks attempts to weed out highly volatile stocks and favors companies with fundamental financial strength, including healthy balance sheets.
"Those two things in combination give the fund a defensive characteristic, or risk/reward profile," says Sotiroff.
The ETF, which is weighted by market capitalization, tries to track the Dow Jones U.S. Dividend 100 Index. Constituents of that index have paid a dividend for at least 10 straight years and are deemed to have the financial wherewithal to continue doing that.
Top sector weightings as of Sept. 30 were energy, consumer staples, healthcare, and industrials. Stocks included drugmaker AbbVie, which yields 3.1%; defense and aerospace company Lockheed Martin, 2.7%; tech giant Cisco Systems, 2.2%; and telecommunications company Verizon Communications, 6.9%.
The fund returned minus 3.2% in 2022, still about 15 percentage points ahead of the S&P 500. It returned 4.6% the following year and 11.7% and 4.3% in 2024 and 20\25, respectively. Last year's performance lagged behind the S&P 500's nearly 18% total return, but the fund can provide some downside protection. It yields an attractive 3.8%.
Another option to consider for a down market is the $120 billion Vanguard Dividend Appreciation ETF. It aims to mimic the S&P U.S. Dividend Growers Index, whose members have grown their dividends for at least 10 straight years. The index differs from the Dow Jones index in that it excludes the top 25% highest-yielding companies that meet that criterion. The rationale: Higher-yielding companies can be risky in terms of maintaining their payouts and facing eventual dividend cuts.
The fund "tends to hold stocks that have stronger fundamentals," Sotiroff says. Its 1.6% yield isn't anything to crow about, but it still beats the S&P 500's 1.1%. And with around 340 holdings, the ETF does offer some diversification -- another way it provides some protection in a down market.
"These dividend ETFs that are more defensive are a little bit safer," he says. "They're taking risk off the table. They are usually giving up yield, because they are in safer companies."
Top sector weightings include information technology (nearly 28%), financials (21.4%), and healthcare (16.7%). Holdings include Apple, which yields 0.4%; JPMorgan Chase, 1.8%; and Exxon Mobil, 3.3%.
There's also the $27 billion Capital Group Dividend Value ETF. It's actively managed, meaning the managers pick stocks rather than track an index.
"It's managed in a more conservative way," says Sotiroff. "It's not going to have the highest yield, but it's built around paying dividends."
The fund recently yielded 1.4%, below the yields offered by the other two funds mentioned above. It returned nearly 29% in 2023, its first full calendar year of existence; about 20% in 2024; and around 25.5% last year.
Top holdings as of Nov. 30 included pharmaceutical company Eli Lilly, which yields 0.7%; Microsoft, 0.8%; and semiconductor company Broadcom, 0.8%. Stocks with higher yields held by that ETF include British American Tobacco at 5.9% and Starbucks at 2.9%.
Its largest sector weighting as of Nov. 30 was information technology at a little more than 25%, followed by industrials (15.6%) and healthcare (14.1%).
Bespoke's Hickey points out that if the market did sell off sharply owing to concerns about equity valuations, richly priced stocks would do the worst while value stocks would hold up better.
"In that type of environment, it's usually higher-yielding dividend stocks that hold up the best," he says.
With that in mind, a more-defensive dividend ETF certainly makes sense as a hedge given the uncertainty for stocks this year.
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This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
January 08, 2026 09:56 ET (14:56 GMT)
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