2. Greater Historical Resilience in Market Downturns

This resilience has been evident during past market declines, as dividend-paying stocks have often acted as a cushion by providing income when overall returns were limited or negative. That role became even more pronounced during periods of muted market performance: In previous decades in which stock returns were in the single digits (noted by gold boxes), dividends accounted for a much larger share of total return (FIGURE 2).

Even more, dividend-paying companies have historically outperformed their non-dividend-paying counterparts during such periods. This trend speaks to the underlying fundamentals and maturity of these companies, which can help their stocks withstand more challenging market environments.

When the broader market (as represented by the S&P 500 Index) has suffered a drawdown of 10% or more, dividend-paying stocks have held up better than those that don’t distribute dividends. Since 1975, our analysis shows that dividend-paying stocks declined by 14.44% during major market drawdowns. By contrast, the equal-weighted S&P 500 Index fell by 19.89%, and non-dividend-paying stocks dropped even more sharply, with an average decline of 28.16%.² In other words, while all segments experienced losses, dividend-paying stocks registered smaller declines—outperforming non-dividend payers by 13.72% and the equal-weighted S&P 500 Index by 5.45% (FIGURE 3).

3. Exposure to Less Economically Sensitive Sectors

Beyond performance metrics, it’s also important to consider the sector composition of dividend-paying stocks. These companies are often concentrated in industries that tend to be less sensitive to broader economic fluctuations.

While the profile of dividend-paying companies has evolved over time, many continue to operate in sectors that provide essential goods and services—areas where demand remains relatively stable regardless of economic conditions. This structural bias can significantly influence how dividend-paying stocks perform, particularly during periods of market volatility or economic uncertainty.

Because these sectors don’t carry as much weight in traditional cap-weighted indices³ such as the S&P 500 Index, dividend strategies offer exposure that can help round out portfolios that are heavily tilted toward the benchmark.

Traditional defensive sectors such as utilities, consumer staples, and healthcare have recently delivered dividend yields above the market average (FIGURE 4).⁴ Companies in these sectors, among others, typically benefit from stable earnings, lower volatility, and robust balance sheets. Their defensive characteristics can make them especially appealing to investors who are seeking strategies that may potentially mitigate risk while maintaining income exposure.

Putting Dividends to Work

There are a variety of ways for investors to incorporate dividend-paying stocks into their portfolios. Some strategies focus exclusively on companies with higher-than-average yields and attractive valuations, often resulting in greater exposure to traditionally high-yielding sectors such as energy, utilities, and real estate. Others blend dividend payers with growth-oriented or cyclical companies, aiming to balance income with capital appreciation, including sectors such as technology that tend to offer lower yields and higher growth potential.

As investors navigate a landscape marked by volatility and shifting dynamics, the flexibility of dividend strategies becomes especially relevant. Dividend-paying stocks can offer a compelling blend of income, a potentially more tempered risk profile, and long-term performance potential. Their historical resilience, especially during market downturns, underscores their potential value as a strategic component in diversified portfolios. By focusing on companies with a history of stable or growing dividends, investors can potentially reduce portfolio volatility while maintaining exposure to essential, economically enduring sectors.

In addition, dividend-paying stocks can provide access to sectors that are underrepresented in traditional cap-weighted indices, offering another layer of diversification that may strengthen overall portfolio construction. This combination of income, historical performance, and diversification may make dividend strategies a useful tool for investors seeking to navigate uncertainty and build more resilient portfolios.