Stocks Look Priced for Perfection. These 3 Dividend ETFs Are Built for the Pullback

The S&P 500 trades at roughly 20x forward earnings, above its 10-year average of 18.8x, leaving little margin if earnings disappoint.

SCHD yields 3.28% while trading at just 18.4x earnings, screening holdings for dividend history, free cash flow, and return on equity.

HDV's three-year beta of 0.33 means it has historically moved far less than the broader market while still yielding 3.14%.

The stock market does not need to crash for today's valuations to become a problem. After another strong run for U.S. equities, investors are paying premium prices for earnings that still need to deliver. The S&P 500 has gained roughly 22% over the past year, while its forward price-to-earnings ratio sits around 20 times earnings. That is not bubble territory on its own, but it does remain above the index's longer-term average.

That leaves less room for disappointment. Slower earnings growth, stubborn inflation, higher interest rates, or a pullback in AI spending could all pressure stocks without triggering a recession. That said, investors do not necessarily need to sell everything and wait in cash. Instead, the Schwab U.S. Dividend Equity ETF ( NYSEARCA:SCHD ), the iShares Core High Dividend ETF ( NYSEARCA:HDV ), and the ProShares S&P 500 Dividend Aristocrats ETF ( NYSEARCA:NOBL ) offer three different ways to stay invested while shifting toward dividends, quality, and more defensive businesses.

Stocks Are Priced for Very Little to Go Wrong

High valuations become dangerous when high expectations are attached to them. Earlier this year, FactSet put the S&P 500's forward P/E at 21.2, above its five-year average of 20.0 and 10-year average of 18.8. Valuations have since eased as earnings caught up with stock prices, but the market can hardly be considered cheap.

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The good news is that earnings have largely justified the rally. Roughly 86% of S&P 500 companies reporting second-quarter results had beaten earnings expectations as of early August. That helps explain why stocks can remain expensive without necessarily being overvalued. The problem is what happens if/when those expectations slip. Paying a premium for strong earnings growth works when companies keep delivering. It becomes much less forgiving when they do not.