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This Type of Fund May Help During a Recession

divdend stock funds recession

Retail investors everywhere want to know: how do we beat the recession? While experts may be somewhat divided over whether or not the U.S. economy is currently in a recession (some of which depends on which political party you are more allegiant to), there is no question that the market is volatile, and if a recession isn’t on just yet it may come in the near future.

One possible answer to shielding your portfolio from the impacts of the recession is to invest in dividend-stock funds. These funds invest mainly in stocks that pay dividends, allowing investors to earn income regularly. A recent article from Morningstar analyst Amy C. Arnott, CFA examined exactly how investing in dividend stock funds can be a plus during a recession.

For more help navigating the recession, consider working with a financial advisor.

Dividend-Stock Funds Basics

Dividends are payments made periodically to investors. Not all stocks pay dividends, but generally those that do pay out on a regular schedule, often quarterly or yearly. The exact payment will be based on how much money the company earned during the payment period, and you’ll get payments based on how many shares you own.

A dividend fund is a type of mutual fund that invests only or mostly in stocks that pay dividends. The fund will get paid dividends from the various companies it invests in, and individual investors will get paid based on how much money they have invested in the fund.

How Dividend-Stock Funds Fare During Recessions

divdend stock funds recession

According to Arnott, “dividend-paying stocks have held up better than average during some but not all recent recessions.” In particular, dividend stocks did better than average during recessions in 1980, 1981-82, 1990-91. They did worse than average in 2001, 2007-09 and 2020.

Though this may seem like mixed results, overall Arnott concludes that “dividend-stock funds’ resilience during most recessionary periods adds to the case that they can make solid portfolio additions.” That said, she also notes that more yield isn’t always better, and that investors should look for high-quality investments first.

How to Invest in Dividend-Stock Funds

There are a number of ways you can invest in dividend-stock funds. The most basic is to find one you like from a fund firm you trust and buy into it. You’ll have to start an account with the firm issuing the firm and invest. Some funds will be traditional mutual funds, where you’ll simply pick how much money you want to invest and put it into the fund; these may have minimum investments. Others will be exchange-traded funds (ETFs) where you buy shares of the fund at a market price.

If you want help investing in dividend-stock funds, you can get the help of a financial advisor. This advisor will help you pick the funds you want to invest in and make the actual transaction for you. You can find an advisor using SmartAsset’s free financial advisor matching service.

The Bottom Line

divdend stock funds recession

While nothing is fool-proof when it comes to beating a recession, Morningstar’s analysis found that dividend-stock funds are often very good at outperforming a downturn. You can invest in these funds directly or with the help of a financial advisor.

Investing Tips

  • A financial advisor can help you with recession investing and overall financial planning. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • To see what your investment might look like down the road, use SmartAsset’s free investment calculator.

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