Stock Market Charlie's Viewpoints Vol. 1: Defensive Dividend ETFs: A Smart Strategy for Navigating Market Uncertainty in 2026

After three years of the S&P 500 strutting around with double-digit returns like it's the prom king, dividend investors might want to think about putting on some protective gear for their portfolios.

One way to do this is by cozying up to some defensive-focused dividend exchange-traded funds (ETFs).

Dan Sotiroff, the wise sage at Morningstar, suggests this is the perfect moment for investors to give their portfolios a makeover, especially after the market's been on a winning streak.

As we dive into 2026, there are some party poopers like sluggish job growth and sky-high stock valuations.

A joyful group of professionals enthusiastically applauding at a social event, captured in a warmly lit venue with hanging decorative lights.

“No sugarcoating here: The S&P 500 is like a designer purse—expensive,” BofA Securities declared in their December 31 research note. While they see a few shiny opportunities, they’re not exactly doing cartwheels, with a year-end target of 7100 for the S&P 500.

This would mean the index might tiptoe up by about 2% this year, based on recent levels.

Plus, 2025 was the third year in a row of the S&P 500's double-digit dance. But a fourth year of this jig? Not a sure thing.

However, defensive dividend ETFs aren’t a magic shield in a market that's doing the limbo.

“Dividend ETFs can soften the blow, but bear markets are like a bull in a china shop—nobody's safe,” says Paul Hickey, co-founder of Bespoke Investment Group.

He points out that in 2022, when stock indexes took a nosedive, most dividend ETFs also stumbled, though they didn’t hit the ground as hard as the overall market.

Dividends did help cushion the fall. The S&P 500 returned minus 18% that year, including dividends. Based solely on prices, the index dropped 19.4%.

A standout in the defensive lineup is the $73 billion Schwab U.S. Dividend Equity ETF. The index it follows tries to dodge the wild and crazy stocks, favoring companies with solid financial muscles and strong balance sheets.

“These factors combine to give the fund a defensive vibe or risk/reward profile,” says Sotiroff.

The ETF, with its market cap weightlifting, aims to mirror the Dow Jones U.S. Dividend 100 Index. Members of this club have been paying dividends for at least a decade and are financially fit to keep the cash flowing.

As of September 30, top sectors included energy, consumer staples, healthcare, and industrials. Stocks in the fund include AbbVie, yielding 3.1%; Lockheed Martin, 2.7%; Cisco Systems, 2.2%; and Verizon Communications, 6.9%.

The fund returned minus 3.2% in 2022, outperforming the S&P 500 by about 15 percentage points. It bounced back with a 4.6% return the next year, and 11.7% and 4.3% in 2024 and 2025, respectively. Although last year’s performance didn’t keep up with the S&P 500’s nearly 18% total return, the fund offers some downside protection with a sweet yield of 3.8%.

Playing Defense

Comparison of dividend-focused ETFs, showing different yield rates, annual returns, and assets under management: Capital Group Dividend Value offers a 1.4% yield with a 26.1% return; Schwab U.S. Dividend Equity provides a 3.8% yield with a 7.0% return; Vanguard Dividend Appreciation has a 1.6% yield with a 16.4% return. Data up to January 6 from Morningstar and Bloomberg.

Three dividend ETFs for investors looking to dodge risk in 2026.

Another contender for a declining market is the $120 billion Vanguard Dividend Appreciation ETF. It aims to mimic the S&P U.S. Dividend Growers Index, which features members that have been upping their dividends for at least 10 years. This index skips the top 25% highest-yielding companies, as those juicy yields can sometimes come with a side of risk.

The fund “tends to hold stocks with stronger fundamentals,” Sotiroff explains. Its 1.6% yield may not be earth-shattering, but it beats the S&P 500’s 1.1%. With around 340 holdings, the ETF also brings some diversification to the table, offering extra protection in a declining market.

“These more-defensive dividend ETFs are kind of like a security blanket,” he notes. “They cut down on risk but often give up some yield, as they stick to safer companies.”

Top sectors include information technology (almost 28%), financials (21.4%), and healthcare (16.7%). Holdings feature Apple, yielding 0.4%; JPMorgan Chase, 1.8%; and Exxon Mobil, 3.3%.

Then there’s the $27 billion Capital Group Dividend Value ETF. It’s actively managed, meaning the managers pick stocks instead of following an index.

“It’s managed with caution,” says Sotiroff. “It might not offer the highest yield, but it’s built around paying dividends.”

The fund recently yielded 1.4%, lower than the other two funds mentioned. It returned nearly 29% in 2023, its first full calendar year; about 20% in 2024; and around 25.5% last year.

Top holdings as of November 30 included Eli Lilly, yielding 0.7%; Microsoft, 0.8%; and Broadcom, 0.8%. Stocks with higher yields in that ETF include British American Tobacco at 5.9% and Starbucks at 2.9%.

Its largest sector weighting as of November 30 was information technology at slightly more than 25%, followed by industrials (15.6%) and healthcare (14.1%).

Bespoke’s Hickey notes that if the market takes a nosedive due to concerns about pricey stocks, the ones with designer labels might suffer the most, while value stocks could hold their ground.

“In such a scenario, higher-yielding dividend stocks usually shine the brightest,” he says.

Considering this, a more-defensive dividend ETF is a smart move given the stock market roller coaster this year.

Best Regards,

Stock Market Charlie