By Al Root

Stock markets go up, stock markets go down -- and a good dividend stock can help smooth out the ride.

And what a ride it's been. Coming into Wednesday, things had been awful for investors. All hell broke loose after President Donald Trump's April 2 "Liberation Day" tariff announcement. Import levies were simply way higher than anyone expected. Odds of a 2025 recession spiked to north of 60% from about 20% in January. And recession fears were rising while consumers faced higher costs, roughly $3,800 a year, because of import levies, according to Yale University's Budget Lab.

The S&P 500 fell 12.1% over the four days following the president's Rose Garden presentation. Then Trump backed down. Gone were the reciprocal tariffs on everyone but China, and the S&P 500 soared in relief.

Investors can take a breath, but they shouldn't assume volatility is over. It's tough to know whether the next 5% move is up or down, so that makes high-quality dividend stocks a good place to be. Some of the highest-quality dividend stocks are the Dividend Aristocrats -- companies that have raised annual payouts for at least 25 years straight. There are 69 of them in the S&P 500, including Coca-Cola, Colgate-Palmolive, Consolidated Edison, and Caterpillar (companies starting with the letter C account for 12 of the names). The ProShares S&P 500 Dividend Aristocrats exchange-traded fund (ticker: NOBL) gives investors exposure to all of them.

The case for dividends remains stronger than ever. Even if the tariff turmoil is over -- a big if -- earnings estimates remain far too high. Wall Street still projects S&P 500 earnings of $269 in 2025, up 9.5% from 2024, but Venu Krishna, Barclays head of U.S. equity strategy, sees scenarios where earnings growth for the S&P 500 in 2025 is totally wiped out, or worse. Typically no, or decelerating, earnings growth would push bond yields lower, but the 10-year Treasury yield is holding steady at a higher level, reflecting fears that investors -- and consumers -- face a period of low growth and high inflation.

That combination is known as stagflation, and it can be devastating for investors. The last extended period occurred from 1973 to 1982, when U.S. real gross domestic product advanced at roughly 2% a year while inflation averaged almost 10%. Stagflation isn't great for stocks. The S&P 500 before dividends was essentially flat from 1973 to 1982. Yield, however, saved the day for investors, who earned an annual total return of about 5% a year, with the gains coming largely from reinvested dividends.

That's where the Dividend Aristocrats come in. They currently yield about 2.8% on average and have the money to support their dividends, with about 65% of the free cash flow generated over the past 12 months paid out to investors. They trade for about 20 times estimated 2025 earnings, slightly more expensive than the S&P 500, but they are also slightly more profitable than the average stock in the index. They have some cushion to weather tariff pain -- and stock market volatility.

The other promising feature about the Aristocrats is that they had already declined substantially, suggesting that they are much closer to a bottom than most stocks. In five recent market meltdowns, including the dot-com bust, the 2008-09 financial crisis, the 2011 federal debt ceiling standoff, Covid, and the 2022 interest interest-rate hike cycle, the average peak-to-trough decline for the S&P 500 was roughly 40%, while the average peak-to-trough decline for the Dividend Aristocrats was about 25%. Through Tuesday's trading, the Aristocrats were down about 15% from recent highs compared with about 17% for the S&P 500. The Aristocrats, by that math, were 10 percentage points from a bottom, while the market was 23 points away.

The risk of loss is ever present, but in an environment like this one, we'll take the Aristocrats' odds.

Write to Al Root at allen.root@dowjones.com

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(END) Dow Jones Newswires

April 10, 2025 02:30 ET (06:30 GMT)

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