Dividend Strategy: Why This ETF Offers Real Value When Stock Market Valuations Hit 155-Year Highs

The Market’s Premium Valuation Challenge

Wall Street entered 2026 at an inflection point. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite delivered robust 2025 performance with year-to-date gains between 13% and 18%. Yet beneath this surface strength lies a sobering reality: market valuations have reached territory unseen since the dot-com bubble burst.

Using the Shiller P/E Ratio (also called the Cyclically Adjusted P/E or CAPE Ratio) as a barometer reveals just how expensive equities have become. This metric averages inflation-adjusted earnings over the previous decade, smoothing out economic cycles where traditional P/E measurements falter. As of mid-December, the S&P 500’s Shiller P/E hit 39.59—a 129% premium above its 155-year historical average of 17.32. Only one moment in market history proved costlier: December 1999, when the ratio peaked at 44.19 during the tech bubble.

Over 15 decades, just six instances saw the Shiller P/E exceed 30 for sustained periods. In all five prior occurrences (excluding today), equity markets subsequently declined by at least 20%. History whispers a clear warning: premium valuations don’t sustain indefinitely.

A Contrarian Play in Overvalued Markets

Yet opportunity persists for discerning investors. While broad market indices command lofty valuations, select corners of the equity universe trade at meaningful discounts—a dynamic that becomes especially relevant when correction risk looms.

The Schwab U.S. Dividend Equity ETF (SCHD) exemplifies this divergence. This fund tracks the Dow Jones U.S. Dividend 100 Index, holding 103 time-tested corporations across pharmaceuticals, consumer staples, and telecommunications. Top positions include pharmaceutical powerhouses Merck, Amgen, Bristol Myers Squibb, and AbbVie—businesses whose demand weathers any economic cycle—alongside consumer stalwarts Coca-Cola and PepsiCo, and communication leader Verizon Communications.

The valuation gap proves striking. While the broad S&P 500 commands a trailing 12-month P/E ratio of 25.63, the average P/E for SCHD’s 103 holdings stands at just 17.18. These mature companies trade at a 33% discount to the market despite offering superior income. SCHD yields approximately 3.8% versus the S&P 500’s meager 1.12%.

The Dividend Advantage Through Market Volatility

Dividend-paying stocks have historically outperformed their non-paying counterparts by a substantial margin. Hartford Funds research spanning 1973-2024 found that dividend stocks delivered 9.2% average annual returns compared to 4.31% for non-payers—while simultaneously exhibiting lower volatility than both the S&P 500 and non-dividend stocks.

This defensive characteristic becomes particularly valuable when premium valuations face pressure. Quality dividend payers generate predictable operating cash flows that support consistent distributions regardless of market sentiment. Companies capable of maintaining rising dividends through economic downturns signal genuine financial strength.

Cost Efficiency and Income Generation

SCHD’s structural advantages extend beyond valuation and yield. The fund’s annual expense ratio of 0.06% ranks among equity ETFs’ most competitive offerings—investors pay just $0.60 annually per $1,000 invested. This compares favorably to the 0.16% average for passive ETFs. Low turnover in the underlying index keeps costs minimal while simplifying tax efficiency.

The combination of reasonable P/E ratios, substantial yield, controlled expenses, and historical outperformance creates a compelling case for dividend-focused exposure as 2026 unfolds. When market valuations rest near historic peaks and correction catalysts lurk in the background, the steady income and relative price stability of quality dividend stocks deserve serious portfolio consideration.