Ironically enough, the one certainty in the stock market is uncertainty. Volatility is as old as the stock market itself, and there’s no reason to believe it’ll stop happening going forward. Add in inflation levels we haven’t witnessed in 40 years and recession fears, and people are rightfully anxious about their finances right now.
There are no foolproof investments, but there are investments that have stood the test of time and have proven to provide stability during times of economic uncertainty. If you’re looking for some stability, look no further than Dividend Aristocrats.
All dividend stocks aren’t created equal
Not all dividend-paying stocks get the heralded title of Dividend Aristocrat. To receive that title, a company must have increased its yearly dividend payout for at least 25 consecutive years. It’s an accomplishment even to maintain a dividend that long, so consistently increasing it over that span makes it more impressive.
Any business that’s managed to get the title of dividend aristocrat in 2022 has managed to increase its dividend since 1997, at minimum. That means they’ve made it through some of the rougher economic times the US has seen: the dot-com bubble (late 90s), the Great Recession (2008), and the COVID-19 pandemic (2020).
During times of uncertainty, it helps to know the companies you’re investing in have weathered bad economic storms before while still managing to reward shareholders. That’s usually a sign of a business with a healthy balance sheet and good management — two things investors should look for in a company.
Kill two birds with one stone
If you want the benefits of Dividend Aristocrats while lessening some of the risks, you can invest in exchange-traded funds (ETFs) that focus specifically on Dividend Aristocrats. Take the ProShares S&P 500 Dividend Aristocrats ETF, for example. It only holds Dividend Aristocrats, but most of the companies held have increased their dividends for at least 40 years, meaning they’re even more battle tested.
ETFs focused on Dividend Aristocrats can also help you kill two birds with one stone by providing diversification. For instance, the ProShares S&P 500 Dividend Aristocrats ETF contains companies from all 11 major sectors, and the top 10 holdings only make up about 18% of the fund (compared to the S&P500, where the top 10 holdings make up over 27%). It’s a win-win for investors.
It helps to reinvest your dividend cash payouts
Dividends, in general, can be rewarding, but investors can help maximize their potential by reinvesting them until retirement instead of receiving cash payouts. Most brokers allow you to do so on their platforms, and they’ll handle all the mechanics for you.
To show the power of reinvesting dividends, let’s imagine we have two investors: one who receives dividends as cash and one who reinvests them. Suppose both invested $500 monthly into the ProShares S&P 500 Dividend Aristocrats ETF. If it returned, on average, 10% annually with a 2.5% dividend yield, here’s how the account totals would look after 20 years:
|Reinvest Dividends?||Amount Contributed Over 20 Years||Account Value After 20 Years|
The investor who received dividends as cash would’ve made money from them over the 20 years, but reinvesting dividends would have generated an account that’s $114,000 larger over 20 years. The compound earnings from reinvesting dividends is powerful.
Keep your eyes on the long-term prize
As a long-term investor, you should be focused on just that: the long term. While it’s not always easy, this means not letting short-term happenings in the stock market cause you to lose sight of your financial goals. It can be tempting to cut back or stop investing during down periods or periods of uncertainty, but rarely is that the right thing to do.
While nothing is guaranteed in the stock market, Dividend Aristocrats can at least give you more peace of mind that they’ll provide value despite the broader economic conditions. If you’re a long-term investor, short-term price fluctuations don’t really matter. What matters is that you continue to receive your dividends during that time and, when you’re in or near retirement, you’ve received a return on investment you’re comfortable with — something investors can be confident in with Dividend Aristocrats.
Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ProShares S&P 500 Aristocrats ETF. The Motley Fool has a disclosure policy.