Dividend-paying trade traded funds are outperforming the broader market, and traders who’re feeling flush have an enviable query to handle: What are they doing with that additional earnings? The S & P 500 is down greater than 2% on the yr as greater oil costs, battle in Iran and synthetic intelligence disruption fears drag down shares. On the identical time, at the moment’s volatility is rewarding regular dividend payers, with the ProShares S & P 500 Dividend Aristocrats ETF (NOBL) and the Vanguard Excessive Dividend Yield ETF (VYM) every up about 4% in 2026 – and that is simply on a worth foundation. NOBL .SPX YTD mountain ProShares S & P 500 Dividend Aristocrats ETF vs. the S & P 500 in 2026 “Dividend-focused ETFs have quietly reasserted their relevance in intervals like this yr when volatility reminds traders that complete return is not solely about worth appreciation,” mentioned Mike Casey, licensed monetary planner and president of American Govt Advisors in McLean, Va. “When markets change into uneven, the consistency of money move tends to alter investor habits in a really tangible means.” Whereas dividend traders have the choice of spending or pocketing the earnings they’re receiving from their shares, there are just a few steps they will take to make use of the cash to shore up their portfolios and put together for additional volatility. Reinvest the dividends Relying in your time horizon, your asset allocation plan and your conviction in your dividend payer, you may use the earnings to purchase extra shares, which may also help you compound returns through the years. Contemplate that Coca-Cola has seen its shares acquire practically 265% over the previous 20 years on a worth foundation, however the complete return – what you’d get in the event you have been to reinvest dividends – is sort of 570% over that point. KO 5Y mountain Coca-Cola shares up to now 5 years The beverage big continues to reward traders who stick round. Coca-Cola raised its quarterly dividend final month to 53 cents from 51 cents per share, the sixty fourth straight yr of dividend hikes. Dividend reinvestment has been a technique that Thomas Van Spankeren, CFP and chief funding officer at Chicago-based RISE Investments, makes use of with youthful purchasers and those that have longer time horizons. “We prefer to reinvest the dividends if there is no such thing as a near-term money move want,” he mentioned. Take the guess work out of compounding returns by enrolling in a dividend reinvestment plan by way of your brokerage, which automates the method. These so-called DRIP applications are additionally much like greenback price averaging, in that you just’re shopping for shares at completely different instances, whatever the share worth motion. Construct up liquidity shops In at the moment’s rocky market, having money on the facet may also help traders keep away from promoting on the worst time — and it retains them prepared to purchase depressed shares if wanted. “A rising phase of purchasers are utilizing dividends as a supply of portfolio liquidity somewhat than promoting belongings throughout volatility,” mentioned Casey. “Retirees or near-retirees usually permit dividends to build up in money and use them to fund dwelling bills.” You’ll be able to decide to have dividends paid on to your brokerage account, and you may decide to reinvest the sums into cash market funds or one other money proxy to behave as a portfolio buffer. Diversify your portfolio Lastly, in the event you have been the type of investor who held off on rebalancing your portfolio when shares have been climbing, take into account redeploying your dividend funds into different underrepresented corners of the market. “If we’re trying to deploy that money, we need to do it in a means that brings the portfolio into steadiness,” mentioned Rick Wedell, chief funding officer of RFG Advisory. “You may even see folks use that dividend fee to purchase stuff that hasn’t achieved in addition to they appear to rebalance their portfolio.” Casey famous that a few of these underrepresented corners of the market might embody worldwide equities, fastened earnings or options. “It is an efficient strategy to hold portfolios aligned with long-term strategic targets with out triggering taxable gross sales,” he mentioned. Know your tax penalties Any dividend-focused technique wants to think about the tax penalties of holding these shares or ETFs, and receiving the funds. Certified dividends are topic to a 0%, 15% or 20% federal tax charge, primarily based in your taxable earnings. Bear in mind that at the same time as federal charges are favorable for dividend traders, your state might slap on one other levy, relying on whether or not it treats dividends as strange earnings. That is the place asset allocation comes into play: Taxes are usually a extra fast consequence for traders who maintain their dividend payers in a taxable brokerage account. In case your time horizon tends to be longer, nonetheless, it’s possible you’ll be higher off retaining these belongings in a tax-deferred account, comparable to a 401(okay) or a person retirement account.
