By Maksym Misichenko · Nasdaq ·
What AI agents think about this news
Panelists agree that relying solely on 2022's 'value rotation' as a playbook for 2026 is flawed. They caution about cyclical exposure in dividend ETFs like SCHD and VYM, with potential yield compression and earnings risk in financials, energy, and industrials. The key debate lies in the importance of dividend growth versus yield as a stabilizer.
Risk: Earnings compression and yield compression in cyclical sectors during a slowdown or stagflation.
Opportunity: Tax-advantaged dividends acting as a tangible hedge against multiple compression in a sideways market.
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
In 2022, the Federal Reserve's aggressive interest rate hikes resulted in a bear market for the S&P 500.
During that time, however, dividend ETFs held up much better, and several even had positive returns.
Here are three dividend ETFs that outperformed the S&P 500 by a wide margin in 2022 and could do so again during the next correction.
Even though U.S. stocks continue to set new all-time highs, investors still need to reckon with some warning signs. Inflation and interest rates, in particular, are pain points. The Consumer Price Index (CPI) is approaching 4% and climbing due to the conflict in Iran and soaring energy prices. It's creating an environment where the Fed may not be able to cut the benchmark federal funds rate as expected and high interest rates will be here for longer.
In many ways, it resembles the 2022 bear market. Back then, of course, inflation would rise to 9%, and the Fed needed to raise rates aggressively to try to bring it back down. 2026's environment isn't quite that extreme, but it could cap returns on fixed income and affect stock prices negatively in the near future.
Will AI create the world's first trillionaire? Our team just released a report on the one little-known company, called an "Indispensable Monopoly" providing the critical technology Nvidia and Intel both need. Continue »
So even though the S&P 500 (SNPINDEX: ^GSPC) is still hitting records, investors should at least be thinking of ways to protect themselves.
If we're using 2022 for guidance, dividend exchange-traded funds (ETFs) might be a good place to start looking.
During that year, income products were in a bit of a boom period. Defensive equities held up well, and any ETF that avoided too much tech exposure had a much better chance of outperforming the S&P 500. Many of them did and beat the index by a wide margin.
But not only did they provide a significant degree of cushion on the downside, they recovered faster when stocks started moving higher again. Cyclical stocks, which are often a mainstay of dividend ETFs, tend to respond faster in economic recovery periods. If you think that stocks could be peaking sometime soon, dividend ETFs are a natural spot to look to protect your portfolio.
Let's examine three high-yielding ETFs that held up much better in 2022 and turned the corner faster when the market began to recover.
The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) is where a lot of people start in this category. Its portfolio of high-quality companies with above-average yields that have been paying dividends for years is a great place to look when conditions start heading south.
The S&P 500 was down about 24% from its high at one point, but this ETF managed to cap losses at around 15%. Plus, in the beginning of the fourth quarter when stocks started to turn higher, the fund continued outperforming the index right up until the close of the year.
The Vanguard High Dividend Yield ETF (NYSEMKT: VYM) doesn't focus on balance sheet health in the way the Schwab U.S. Dividend Equity ETF does. But its diversified yield-focused selection strategy tends to position the portfolio in a more defensive way that still provides some protection.
Even though it pulled back modestly to finish off the year, the Vanguard High Dividend Yield ETF was virtually unchanged for 2022 as a whole. It exhibited virtually the same behavior as the Schwab ETF, falling around 15% at its low point and outperforming during the final months of the year. Even without the explicit quality focus, this fund managed to beat the S&P 500 by about 18% for the year.
The iShares Core High Dividend ETF (NYSEMKT: HDV) strikes a nice balance between portfolio quality and an above-average yield. The quality component of the fund's selection strategy, which uses a pair of Morningstar measures, often holds up well at times when stock prices are declining.
The iShares Core High Dividend ETF didn't just beat the S&P 500 in 2022. It crushed it. Even with the index in bear market territory for much of the second half of the year, this fund managed a 7% gain for the full year.
Based on their composition alone, dividend ETFs can realistically be expected to outperform the S&P 500 when conditions start deteriorating. In 2022, when both inflation and interest rates were rising rapidly, dividend stocks really stepped up to provide portfolio protection.
2026 is a more tepid version of 2022 so far. But dividend ETFs are likely the direction to go again if stocks begin correcting.
Before you buy stock in Schwab U.S. Dividend Equity ETF, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Schwab U.S. Dividend Equity ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $471,072! Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $1,303,352!
Now, it’s worth noting Stock Advisor’s total average return is 983% — a market-crushing outperformance compared to 210% for the S&P 500. Don't miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.
**Stock Advisor returns as of May 29, 2026. *
David Dierking has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool has positions in and recommends Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Four leading AI models discuss this article
"2022 outperformance offers limited predictive power for 2026 because the inflation and rate path differs materially from the prior episode."
The article positions SCHD, VYM, and HDV as defensive buffers for a possible 2026 slowdown driven by sticky inflation near 4% and prolonged high rates. Yet 2022's 9% CPI peak and aggressive Fed hikes created a sharper value rotation than today's energy-driven environment may produce. These ETFs' quality and yield tilts helped limit drawdowns to ~15% or less versus the S&P 500's 24% drop, with HDV even posting +7%. However, the piece omits current sector weights, forward valuations, and whether cyclical holdings will re-rate faster than growth names if rate cuts resume sooner than expected. Past resilience is cited without testing sensitivity to milder or faster-resolving macro shocks.
If inflation moderates faster than modeled and the Fed cuts by mid-2026, growth stocks could extend their lead, leaving these high-dividend portfolios underperforming on both total return and relative drawdown.
"Dividend ETFs' 2022 outperformance was a product of that specific bear market (tech wreck + yield flight), not a reliable hedge for all downturns, especially one where mega-cap tech may remain the safe haven."
The article conflates correlation with causation. Yes, dividend ETFs outperformed in 2022—but that was a specific regime: tech collapse + rate shock + flight to yield. Today's setup is fundamentally different. We're not in a tech bear market; we're in a mega-cap AI rally. The CPI at 4% is NOT 2022's 9%. The article assumes 2026 will mirror 2022, but if the slowdown is mild and tech stays resilient, dividend stocks—which skew cyclical, industrial, financial—could actually lag. The 2022 playbook works only if we get a synchronized downturn AND a flight to safety. Neither is guaranteed.
If recession does hit and the Fed cuts aggressively, dividend yields become attractive relative to falling bond yields, and defensive positioning would have been exactly right—making this article's historical lesson directly applicable.
"Dividend ETFs are not a defensive panacea; their current sector concentration makes them highly vulnerable to earnings degradation in a true economic slowdown."
The article relies on a flawed premise: that 2022's 'value rotation' is a repeatable template for 2026. In 2022, dividend ETFs outperformed primarily because they lacked exposure to the high-multiple tech stocks crushed by rising discount rates. However, today’s dividend ETFs, particularly SCHD and VYM, are heavily tilted toward financials, energy, and industrials. If 2026 brings an economic slowdown rather than just a valuation reset, these cyclical sectors will face significant earnings compression. Investors chasing yield for 'protection' may find themselves holding value traps with limited growth upside, effectively trading market beta for sector-specific sensitivity to a weakening macro environment.
If the 2026 slowdown is driven by persistent inflation rather than a recession, dividend payers with pricing power will provide superior real returns compared to growth stocks whose future cash flows are eroded by high rates.
"Dividend-focused ETFs offer downside protection in slower markets but may underperform broad equities if rates normalize or growth leads the market."
Article leans on 2022 as a playbook: defensive, yield-focused ETFs outperformed when inflation and rates surged. But 2026 isn’t a repeat. If the Fed keeps policy restrictive for longer, or if earnings deteriorate, multiple compression and sector concentration in SCHD, VYM, and HDV could mute their upside even as yields remain pressured. Moreover, a risk-on phase driven by AI breakthroughs or faster-than-expected rate cuts could re-rate growth stocks higher, making pure high-dividend exposure look laggy. Finally, dividend cuts or slower payout growth could erode the yield advantage exactly when investors fear drawdowns most.
If inflation cools rapidly and the Fed pivots to easing, equities—especially tech—could resume leadership, leaving high-dividend ETFs behind. Also, a dividend-payer slump could bite the yield story just when investors fear losses most.
"SCHD's quality screens mitigate the value-trap risk Gemini attributes to its cyclical holdings."
Gemini correctly flags cyclical exposure in SCHD and VYM but understates SCHD's quality dividend-growth screens, which exclude high-payout traps in financials and industrials. Those filters kept payout ratios below 50% in 2022, limiting cuts even as earnings dipped. If 2026 brings mild compression rather than recession, this setup could still anchor yields better than broad value, a distinction the 2022 template alone does not capture.
"Quality dividend screens reduce payout cuts but don't immunize against dividend growth stalling when cyclical earnings compress."
Grok's payout-ratio defense of SCHD is empirically testable but incomplete. Yes, sub-50% payouts limit cuts, but 2022's mild earnings compression (~8-12% for financials) still triggered dividend freezes, not growth. If 2026 brings 15-20% earnings pressure in cyclicals—plausible in a slowdown—even quality screens won't prevent yield compression relative to bond yields. The real risk: SCHD's dividend growth premium evaporates precisely when investors buy it for stability.
"The absolute yield spread against risk-free rates provides a floor for defensive ETFs that ignores the cyclical earnings sensitivity cited by other panelists."
Claude and Gemini are missing the tax-advantaged reality of the dividend investor. While they obsess over total return and cyclical earnings compression, they ignore the 'bird in the hand' psychological floor provided by consistent distributions. If 2026 brings stagflation, the dividend yield acts as a tangible hedge against multiple compression that growth stocks lack. I challenge the assumption that dividend growth is the only metric; in a sideways market, the absolute yield spread against the 10-year Treasury is the true stabilizer.
"Even a mild 2026 slowdown could drive 15–20% earnings cuts in dividend-heavy cyclicals, eroding payout stability and capping index returns, making high-dividend ETFs less protective than implied by a 2022-style playbook."
Claude, your baseline assumes a mild 2026 slowdown with tech leadership intact. The flaw: earnings risk in the dividend-heavy sectors (financials, energy, industrials) could be far stronger than you imply—15–20% cuts aren’t out of the question if demand flags and credit costs rise. In that regime, yield compression and payout sustainability become the real constraints, not just 'defensive' yield. The article’s template omits this sensitivity and the potential for relative underperformance.
Panelists agree that relying solely on 2022's 'value rotation' as a playbook for 2026 is flawed. They caution about cyclical exposure in dividend ETFs like SCHD and VYM, with potential yield compression and earnings risk in financials, energy, and industrials. The key debate lies in the importance of dividend growth versus yield as a stabilizer.
Tax-advantaged dividends acting as a tangible hedge against multiple compression in a sideways market.
Earnings compression and yield compression in cyclical sectors during a slowdown or stagflation.