Sensing a Market Top? Seek this Stock for Downside Protection

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The S&P 500 is up more than 8% year-to-date, leading many to believe the market's recent performance is disconnected from the economy at large. As investors look forward, they see a “great rotation” from bonds to stocks lifting the general market, not out of appreciation for equities, but from a fear that fixed-income performance will only leave investors behind.

There are substitutes to the broad market, though. One hot ETF gives investors all the exposure to stocks they might need, with less volatility and market-beating returns.

A dividend ETF for all

The SPDR S&P Dividend ETF (NYSEMKT: SDY) has logged market-beating performance, while providing investors with a less volatile portfolio. In a low rate environment like this one, the fund's impressive 3% dividend yield gives the fund a natural buoy when stocks take a dip, and more upside when equities outperform.

Don't worry, the 86 companies making up the fund have been discovered for their consistent profits, earnings quality, and dividend payments. The fund is built around a popular Dividend Aristocrats index, and it trades at a relative premium to the broad market S&P 500 index. The Dividend ETF has a forward earnings multiple of 15.59 compared to 13.77 for the S&P 500 ETF (NYSEMKT: SPY) tracker.

However, the fund makes it up in consistency. Companies in the index are selected after years of consistent dividend growth and high annual yields. In the last five years, the SPDR Dividend ETF delivered enormous 47% total returns compared to the S&P 500 index. The fund trumps the index in yields, rewarding investors with 50% more dividends each year.

Positioning for a great rotation...or a dip

The great thing about the SPDR Dividend ETF is that it puts investors in line to be successful in any market.

Consider two likely outcomes of this year's trading:

  1. A great rotation happens, and bond investors swap fixed income investments for equity exposure. Their preference will likely be for high-yielding dividend stocks, such as those that make up the Dividend Acheivers index. Advisors are pointing to a risk-on attitude with those who previously enjoyed bond investments. Bond-like yields in the equities space are particularly alluring for those who want capital appreciation and consistent income.

  2. Stocks sell off as the market corrects for spectacular recent performance. The Dividend Aristocrats, having a consistent dividend history and high yields to backstop a market drop, will be supported by their relative yields. 

In any event, those who position themselves in top-quality dividend paying companies win out. Over time, more than half of the stock market's return has come from dividends. History also shows that dividend-paying companies are less volatile, while a basket of high-quality firms tend to outperform the market. The Dividend Acheivers have even kept pace in recent stock market rallies - in fact, they're beating the S&P 500 this year by nearly 3%...and it's only March.

Whether you're interested in front-running a great rotation, or making a long-term investment in a quality fund, the SPDR Dividend ETF is an attractive alternative to the broad market S&P 500 tracker.


valuemagnet has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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