Dividend-paying exchange traded funds are outperforming the broader market, and investors who are feeling flush have an enviable question to address: What are they doing with that extra income? The S & P 500 is down more than 2% on the year as higher oil prices, war in Iran and artificial intelligence disruption fears drag down stocks. At the same time, today's volatility is rewarding steady dividend payers, with the ProShares S & P 500 Dividend Aristocrats ETF (NOBL) and the Vanguard High Dividend Yield ETF (VYM) each up about 4% in 2026 – and that's just on a price basis. NOBL .SPX YTD mountain ProShares S & P 500 Dividend Aristocrats ETF vs. the S & P 500 in 2026 "Dividend-focused ETFs have quietly reasserted their relevance in periods like this year when volatility reminds investors that total return isn't only about price appreciation," said Mike Casey, certified financial planner and president of American Executive Advisors in McLean, Va. "When markets become choppy, the consistency of cash flow tends to change investor behavior in a very tangible way." While dividend investors have the option of spending or pocketing the income they're receiving from their stocks, there are a few steps they can take to use the money to shore up their portfolios and prepare for further volatility. Reinvest the dividends Depending on your time horizon, your asset allocation plan and your conviction in your dividend payer, you might use the income to buy more shares, which can help you compound returns over the years. Consider that Coca-Cola has seen its shares gain nearly 265% over the past 20 years on a price basis, but the total return – what you'd get if you were to reinvest dividends – is nearly 570% over that time. KO 5Y mountain Coca-Cola shares in the past five years The beverage giant continues to reward investors who stick around. Coca-Cola raised its quarterly dividend last month to 53 cents from 51 cents per share, the 64th straight year of dividend hikes. Dividend reinvestment has been a strategy that Thomas Van Spankeren, CFP and chief investment officer at Chicago-based RISE Investments, uses with younger clients and those who have longer time horizons. "We like to reinvest the dividends if there is no near-term cash flow need," he said. Take the guess work out of compounding returns by enrolling in a dividend reinvestment plan through your brokerage, which automates the process. These so-called DRIP programs are also similar to dollar cost averaging, in that you're buying shares at different times, regardless of the share price action. Build up liquidity stores In today's rocky market, having cash on the side can help investors avoid selling at the worst time — and it keeps them ready to buy depressed shares if needed. "A growing segment of clients are using dividends as a source of portfolio liquidity rather than selling assets during volatility," said Casey. "Retirees or near-retirees often allow dividends to accumulate in cash and use them to fund living expenses." You can opt to have dividends paid directly to your brokerage account, and you can opt to reinvest the sums into money market funds or another cash proxy to act as a portfolio buffer. Diversify your portfolio Finally, if you were the kind of investor who held off on rebalancing your portfolio when stocks were climbing, consider redeploying your dividend payments into other underrepresented corners of the market. "If we're looking to deploy that cash, we want to do it in a way that brings the portfolio into balance," said Rick Wedell, chief investment officer of RFG Advisory. "You may see people use that dividend payment to buy stuff that hasn't done as well as they look to rebalance their portfolio." Casey noted that some of these underrepresented corners of the market may include international equities, fixed income or alternatives. "It's an effective way to keep portfolios aligned with long-term strategic targets without triggering taxable sales," he said. Know your tax consequences Any dividend-focused strategy needs to consider the tax consequences of holding these stocks or ETFs, and receiving the payments. Qualified dividends are subject to a 0%, 15% or 20% federal tax rate, based on your taxable income. Be aware that even as federal rates are favorable for dividend investors, your state may slap on another levy, depending on whether it treats dividends as ordinary income. That's where asset allocation comes into play: Taxes tend to be a more immediate consequence for investors who hold their dividend payers in a taxable brokerage account. If your time horizon tends to be longer, however, you may be better off keeping these assets in a tax-deferred account, such as a 401(k) or an individual retirement account.
