Stocks Look Priced for Perfection. These 3 Dividend ETFs Are Built for the Pullback

Quick Read

• The S&P 500 trades at roughly 20x forward earnings, above its 10-year average of 18.8x, leaving little margin if earnings disappoint.

• SCHD yields 3.28% while trading at just 18.4x earnings, screening holdings for dividend history, free cash flow, and return on equity.

• HDV’s three-year beta of 0.33 means it has historically moved far less than the broader market while still yielding 3.14%.

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The stock market does not need to crash for today’s valuations to become a problem. After another strong run for U.S. equities, investors are paying premium prices for earnings that still need to deliver. The S&P 500 has gained roughly 22% over the past year, while its forward price-to-earnings ratio sits around 20 times earnings. That is not bubble territory on its own, but it does remain above the index’s longer-term average.

That leaves less room for disappointment. Slower earnings growth, stubborn inflation, higher interest rates, or a pullback in AI spending could all pressure stocks without triggering a recession. That said, investors do not necessarily need to sell everything and wait in cash. Instead, the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD), the iShares Core High Dividend ETF (NYSEARCA:HDV), and the ProShares S&P 500 Dividend Aristocrats ETF (NYSEARCA:NOBL) offer three different ways to stay invested while shifting toward dividends, quality, and more defensive businesses.

Stocks Are Priced for Very Little to Go Wrong

High valuations become dangerous when high expectations are attached to them. Earlier this year, FactSet put the S&P 500’s forward P/E at 21.2, above its five-year average of 20.0 and 10-year average of 18.8. Valuations have since eased as earnings caught up with stock prices, but the market can hardly be considered cheap.

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The good news is that earnings have largely justified the rally. Roughly 86% of S&P 500 companies reporting second-quarter results had beaten earnings expectations as of early August. That helps explain why stocks can remain expensive without necessarily being overvalued. The problem is what happens if/when those expectations slip. Paying a premium for strong earnings growth works when companies keep delivering. It becomes much less forgiving when they do not.

That is where dividend ETFs can make sense. They will not protect you from every market decline, but they can reduce dependence on continued multiple expansion while paying you income along the way.

SCHD: Quality Dividends at a More Reasonable Price

The Schwab U.S. Dividend Equity ETF is probably the best all-around choice for investors who want to stay invested without paying the broader market’s premium valuation. SCHD tracks the Dow Jones U.S. Dividend 100 Index and currently holds 103 stocks. The fund charges just 0.06% annually and offers a 30-day SEC yield of 3.28%.

More importantly for today’s market, SCHD’s portfolio traded at just 18.4 times earnings as of June 30. The fund does more than chase the stocks with the biggest yields. Its underlying index screens companies using factors that include dividend history, free cash flow to total debt, return on equity, and dividend growth. The result is a portfolio tilted toward established companies capable of supporting their payouts.

Understandably, you are still taking equity risk with SCHD. However, paying roughly 18 times earnings while collecting a yield above 3% gives you a different starting point than paying a higher multiple for the broader market.

HDV: Higher Income with Less Market Sensitivity

The iShares Core High Dividend ETF takes the defensive argument one step further. HDV holds 75 stocks and currently offers a 3.14% 30-day SEC yield while charging an expense ratio of just 0.08%.

The portfolio includes mature businesses such as Exxon Mobil, AbbVie, Chevron, Verizon, Procter & Gamble, and Coca-Cola. These are not companies investors typically buy because they expect explosive revenue growth. They own them because their businesses generate cash and can continue paying dividends throughout varying economic environments.

The numbers reinforce that defensive profile. HDV had a three-year equity beta of just 0.33 and three-year standard deviation of 11.3%. That does not mean HDV cannot fall during the next correction, but it does suggest the portfolio has historically moved considerably less than the broader equity market.

NOBL: 25 Years of Dividend Growth Is a High Bar

The ProShares S&P 500 Dividend Aristocrats ETF takes a different approach. Instead of focusing primarily on current yield, NOBL owns companies in the S&P 500 that have increased their dividends every year for at least 25 consecutive years.

That requirement matters. A company that has increased its dividend for 25 straight years has already lived through the dot-com crash, the 2008 financial crisis, the pandemic, inflation, and multiple interest-rate cycles. NOBL currently owns 69 companies and uses an equal-weighted index methodology, preventing today’s largest stocks from dominating the portfolio.

The trade-off is income. NOBL’s 30-day SEC yield was only 2.18% as of June 30, below both SCHD and HDV, while its 0.35% expense ratio is also higher. However, the goal here is dividend durability rather than maximizing today’s headline yield.

What This Means for You

None of these ETFs will make your portfolio crash-proof. If the S&P 500 drops sharply, SCHD, HDV, and NOBL are likely to decline as well. The advantage is what you own while you wait for the market to recover.

SCHD gives you quality dividend stocks at a more reasonable valuation. HDV offers higher income and historically lower market sensitivity. NOBL gives you companies with at least a quarter-century of consecutive dividend growth. You do not need to predict when the next pullback will arrive. If stocks really are priced for perfection, owning businesses that generate cash and return some of it to you could be a good place to wait when the market finally gets disappointed.

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How do you continue to grow a seven-figure portfolio in retirement? The last thing you want is to run out of money, you want your money to generate lasting income while you enjoy your life.

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