Can this dividend-paying ETF help protect me against a stock market crash?

The recent discovery of another strain of Covid has already given the market jitters. My thinking is that shares with a high dividend yield can offer good protection against a stock market crash that might be on the cards. In many cases, stocks that offer a high yield can be a safer bet than growth stocks. They should be less volatile as investors may hold on to them for the dividend stream, instead of bailing out when the market declines.

But rather than picking individual dividend-paying shares, I’m looking at an exchange traded fund (ETF).

ETFs are funds that track an index or sector and can be bought and sold like shares through most online brokers. They allow me to invest in multiple companies in a single fund and are usually low-cost. 

The ETF I’m looking at

SPDR S&P Global Dividend Aristocrats UCITS ETF (LSE: GBDV) is one I’ve been considering for a while. Its aim is to invest in global high-dividend-yielding companies by tracking the S&P Global Dividend Aristocrats Quality Income Index. 

This index aims to track global companies that are over $1bn in market capitalisation, that have maintained or increased dividends for at least 10 consecutive years, while at the same time having a positive return on equity and cash flows from operations.

This ETF is a good size at over $700m and is relatively low-cost. For my portfolio, diversification is one of the ways I try to reduce risk and this ETF ticks all the boxes across companies, countries and sectors.

First, there are around 100 companies in this fund, with no company having more than 3% weighting within the ETF. There are some household names in there like Exxon Mobil Corp and GlaxoSmithKline. Second, the fund is geographically diverse. Some 45% is invested in US companies, around 8% is invested in both the UK and Japan, while other holdings come from all around the world. Finally, I like the fact that sectors as diverse as banking, utilities and insurance are covered. 

Am I going to invest?

The dividend yield is currently around 3.7%, which is a reasonable return. If the market declines, I think this may encourage other investors to hang on to this ETF for the dividends. If so, it will be less volatile than other funds or shares out there.

I feel that this ETF can act as a safety buffer for me in uncertain times. That’s because with this fund holding only those companies that have sustained or increased dividends over 10 years, I’d feel more confident holding on to this ETF if the stock market crashes.

However, it’s not risk-free. Dividends can be reduced at any time and not all high-dividend shares are winners. Some companies maintain high dividends to keep their investors happy when the company isn’t actually growing. In the long run, firms like these are likely to fail.

That said, I believe diversification is important to my portfolio. Although other investors may disagree, I think a dividend-paying ETF like this can be a good addition in case of a stock market crash. I’m going to seriously consider adding it to my holdings.

Niki Jerath has no position in any of the shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.