Trying to dodge a bear market can mean selling after prices fall and missing the recovery. Vanguard Dividend Appreciation ETF screens for companies with long records of dividend growth, but investors still face stock-market risk.
Since 1928, the S&P 500 has had 27 bear markets, defined as declines of 20% or more. The next one cannot be reliably sidestepped by watching the calendar. Selling ahead of a fall may limit some losses. It can also leave investors in cash after prices start to recover. Markets fall hard.
Since the Great Depression, the average bear market has fallen about 35% and lasted just over nine months. The average bull market has gained 112% and lasted roughly 2.7 years. These are historical averages, not a timetable for the next decline or recovery.
Vanguard Dividend Appreciation ETF (VIG) takes a different approach. It holds large-cap companies that have raised their dividends for at least 10 consecutive years. That record may point to businesses able to keep paying shareholders through different conditions. It is a screening rule, not a promise of safety or a forecast of returns.
VIG switched from the Nasdaq U.S. Dividend Achievers Select Index to the S&P U.S. Dividend Growers Index on September 20, 2021.
Why timing is difficult
The historical pattern favors staying invested. That does not make every downturn easy to endure. Investors who sell after a steep drop turn a paper loss into a realized one. They may then wait for conditions to feel safer before returning, even as prices rebound. That can mean less time in the market and missed gains.
This does not mean every investor should hold every stock through every downturn. It does show why a crash-avoidance strategy is hard to carry out consistently.
What VIG screens for
VIG focuses on U.S. large-cap stocks whose companies have increased regular dividends for at least a decade. The S&P U.S. Dividend Growers Index also excludes the 25% of eligible stocks with the highest indicated dividend yields. The strategy favors dividend growth over the highest current income. Vanguard says VIG holds the index's constituents in approximately the same proportions. Recent public data put the fund's holdings at about 335 to 343. It charges a 0.04% expense ratio and began operations on April 21, 2006. Schwab's VIG holdings data provides a current portfolio snapshot.
Market summaries place VIG among the world's largest dividend ETFs, with reported assets under management estimates ranging from about $111 billion to $132 billion.
A company needs to keep generating enough resources to maintain and grow its dividend. That history offers a practical quality filter. The fund does not add a separate fundamental screen for balance-sheet strength or competitive advantage. It is a screen, not a guarantee.
A long record of dividend growth cannot guarantee that a company will keep raising its payout. It cannot ensure that the share price will hold up or that VIG will lose less than the broader market in a particular downturn. VIG is still a stock fund, so investors face market risk. Its dividend strategy is not the same as holding cash or bonds.
Using a downturn deliberately
For investors who already plan to own diversified stock funds over a long horizon, a market pullback can lower the price of additional shares. Regular contributions can also keep each purchase from depending on a market forecast. Further declines remain possible. This approach only works when the money is not needed soon and the investor can tolerate losses.
A recent market coverage report said Treasury yields were pressuring stocks. A dividend-growth screen does not remove those forces. Investors should compare a fund's holdings and risks with their time horizon, cash needs, and overall portfolio. A dividend record is no substitute for diversification.
VIG may suit investors who want exposure to large companies with established dividend-growth histories. It is not a crash shield. The fund's screen may focus its portfolio on businesses that have shown sustained payout growth, but past performance cannot tell investors how those companies will fare in the next downturn. Recent market data put its current dividend yield at roughly 1.48% to 1.55%. The fund pays distributions quarterly. The case for buying during a selloff rests on a long investment horizon and the ability to stay invested, not on confidence that VIG will avoid losses.
