Do Dividend Stocks Hold Up in a Crash? SCHD, VYM and VIG Since 2008

"Dividend fund" covers two quite different recipes. High-yield funds, such as VYM, hold the companies paying the most relative to their share price. Dividend-growth funds, such as VIG, hold companies that have raised their dividend every year for a long stretch, usually ten years or more, whatever the yield. SCHD sits in between: it starts from companies with a long record of paying, then picks for a mix of yield, dividend growth and financial strength.

The difference matters in a crash. A high yield can be a sign of a cheap, healthy business, or of a business the market has started to doubt. A long record of raising the dividend says something about a company's profits and balance sheet through past downturns. Those are different screens, and they have behaved differently when stocks fell.

VYM and VIG both launched before the 2008 financial crisis, SCHD in late 2011, and JEPI in 2020. Over the months the S&P 500 fell from its peak to its bottom in each crash, here is how their prices moved.

In 2008 the S&P 500 fell about 56%. The dividend-growth fund VIG fell about 48%, a real cushion, but the high-yield fund VYM fell about 59%, further than the market. In the late-2018 selloff, all three dividend funds fell a little less than the S&P 500's 20%. In the 2020 COVID crash they fell about as far as the market: SCHD about 33%, VIG about 32% and VYM about 35%, against about 34% for the S&P 500.

The 2022 bear market is where dividend funds earned their reputation: SCHD fell about 17% and VYM about 15% while the S&P 500 fell about 25%. That was a selloff led by expensive growth and technology stocks, which dividend funds hold little of.

In 2007, many of the highest dividend payers in the US were banks and other financial companies. They looked like classic income stocks right up until the housing and credit collapse hit them first and hardest, and many cut or suspended their dividends. A fund that ranks companies by yield owned plenty of them, and a falling share price only pushes a troubled company's yield higher, which can make it look more attractive to a yield screen, not less.

A dividend-growth screen avoided some of that, because a company only stays in the index while it keeps raising its payout. That is not a guarantee: no screen can know which sector the next crash will hit. The lesson from 2008 is that the label "dividend" says little about crash behavior on its own. What the fund actually holds, by sector, says more.

A dividend is real cash, and in a crash that can matter. If you live on the income, a fund that keeps paying lets you avoid selling shares near the bottom. That is the strongest practical case for dividend funds in retirement.

But a dividend is not extra return on top of the price. When a company pays one, its share price drops by about the same amount that day, so the cash comes out of the value you already own. A yield of 3% to 4% a year is also small next to a fall of 30% or more. And dividends get cut in bad years: the S&P 500's dividends per share fell by roughly a fifth from 2008 to 2009.

Falling less is also not the same as recovering faster. After 2022, SCHD took about 22 months from its bottom to get back to its old price high, against about 15 for the S&P 500, because the growth stocks that fell hardest also bounced hardest. After 2020, VYM took about 10 months to the S&P 500's 5. Those counts use price only; with dividends reinvested, the higher-yielding funds would have recovered somewhat sooner.

Funds such as JEPI hold a basket of stocks and sell call options on the market, turning part of the future upside into extra monthly income today. In the 2022 bear market JEPI's price fell about 19%, less than the S&P 500's 25%. The trade-off shows up in strong markets, when the options sold cap how much of a rally the fund keeps. Much of the high payout is option income rather than company dividends, so its yield is not comparable with a fund like SCHD.

JEPI has only been through one bear market since it launched in 2020, which is too short a record to say how it would behave in a 2008-style crash.

The useful question is not whether dividend funds are safe, but what a dividend tilt would do to your mix. Backtest your portfolio as it is and with a slice moved into a dividend fund, compare the maximum drawdown and the recovery time, and look at the total return over the whole period, not just the crash months. Then replay both versions through 2008, 2020 and 2022 in the stress test, since the dividend funds behaved so differently in each.

Educational, not advice: whether a dividend fund belongs in your portfolio depends on your goals, your need for income, your taxes and everything else you own.