Dividend-paying alternate traded funds are outperforming the broader market, and traders who’re feeling flush have an enviable query to handle: What are they doing with that further revenue? The S & P 500 is down greater than 2% on the 12 months as larger oil costs, conflict in Iran and synthetic intelligence disruption fears drag down shares. On the identical time, right now’s volatility is rewarding regular dividend payers, with the ProShares S & P 500 Dividend Aristocrats ETF (NOBL) and the Vanguard Excessive Dividend Yield ETF (VYM) every up about 4% in 2026 – and that is simply on a value foundation. 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 intervals like this 12 months when volatility reminds traders that whole return is not solely about value appreciation,” mentioned Mike Casey, licensed monetary planner and president of American Government Advisors in McLean, Va. “When markets turn out to be uneven, the consistency of money move tends to alter investor habits in a really tangible method.” Whereas dividend traders have the choice of spending or pocketing the revenue they’re receiving from their shares, there are just a few steps they will take to make use of the cash to shore up their portfolios and put together for additional volatility. Reinvest the dividends Relying in your time horizon, your asset allocation plan and your conviction in your dividend payer, you would possibly use the revenue to purchase extra shares, which will help you compound returns through the years. Take into account that Coca-Cola has seen its shares achieve practically 265% over the previous 20 years on a value foundation, however the whole return – what you’d get when you have been to reinvest dividends – is almost 570% over that point. KO 5Y mountain Coca-Cola shares prior to now 5 years The beverage large continues to reward traders who stick round. Coca-Cola raised its quarterly dividend final month to 53 cents from 51 cents per share, the sixty fourth straight 12 months of dividend hikes. Dividend reinvestment has been a method that Thomas Van Spankeren, CFP and chief funding officer at Chicago-based RISE Investments, makes use of with youthful purchasers and people who have longer time horizons. “We prefer to reinvest the dividends if there isn’t any near-term money move want,” he mentioned. Take the guess work out of compounding returns by enrolling in a dividend reinvestment plan by means of your brokerage, which automates the method. These so-called DRIP packages are additionally just like greenback price averaging, in that you simply’re shopping for shares at totally different instances, whatever the share value motion. Construct up liquidity shops In right now’s rocky market, having money on the aspect will help traders keep away from promoting on the worst time — and it retains them prepared to purchase depressed shares if wanted. “A rising phase of purchasers are utilizing dividends as a supply of portfolio liquidity quite than promoting property throughout volatility,” mentioned Casey. “Retirees or near-retirees typically enable dividends to build up in money and use them to fund dwelling bills.” You’ll be able to decide to have dividends paid on to your brokerage account, and you may decide to reinvest the sums into cash market funds or one other money proxy to behave as a portfolio buffer. Diversify your portfolio Lastly, when you have been the sort of investor who held off on rebalancing your portfolio when shares have been climbing, take into account redeploying your dividend funds into different underrepresented corners of the market. “If we’re trying to deploy that money, we wish to do it in a method that brings the portfolio into stability,” mentioned Rick Wedell, chief funding officer of RFG Advisory. “You might even see folks use that dividend fee to purchase stuff that hasn’t accomplished in addition to they appear to rebalance their portfolio.” Casey famous that a few of these underrepresented corners of the market could embody worldwide equities, fastened revenue or options. “It is an efficient approach to preserve portfolios aligned with long-term strategic targets with out triggering taxable gross sales,” he mentioned. Know your tax penalties Any dividend-focused technique wants to contemplate the tax penalties of holding these shares or ETFs, and receiving the funds. Certified dividends are topic to a 0%, 15% or 20% federal tax fee, based mostly in your taxable revenue. Bear in mind that at the same time as federal charges are favorable for dividend traders, your state could slap on one other levy, relying on whether or not it treats dividends as abnormal revenue. That is the place asset allocation comes into play: Taxes are usually a extra quick consequence for traders who maintain their dividend payers in a taxable brokerage account. In case your time horizon tends to be longer, nonetheless, it’s possible you’ll be higher off protecting these property in a tax-deferred account, akin to a 401(ok) or a person retirement account.