Testing whether dividend stocks are actually defensive
VYM vs VTI, the 2008 crisis
Dividend funds are routinely described as defensive: steadier businesses, income while you wait, smaller declines when markets fall. The 2008 crisis is the obvious place to test that claim, and the test does not go the way the claim predicts.
#What this plan actually returned
These are real results, not estimates. We ran $10,000 up front plus $500 a month from January 1, 2007 to December 31, 2009 (3.0 years), with dividends reinvested, against actual daily closing prices for each fund.
| Ticker | Invested | Final value | Total return | Ann. return | Worst drop |
|---|---|---|---|---|---|
| VYM | $28,000 | $25,957 | -7.30% | -3.74% | -56.98% |
| VTI | $28,000 | $26,996 | -3.59% | -1.81% | -55.45% |
Ann. return is the internal rate of return (IRR), which accounts for how long each individual contribution was invested, so it is lower than the headline total return on a plan that kept adding money. Worst drop is the deepest peak-to-trough decline in the fund itself during this window, measured on daily closes.
Pre-tax and excluding brokerage commissions. See How It Works for the full methodology, or re-run this exact comparison with your own numbers.
#The defensive claim does not survive the data
Across the three years spanning the crisis, both plans contributed $28,000. VTI, the total US market, finished at roughly $27,000. VYM, the high dividend yield fund, finished at roughly $26,000. The broad market lost less.
The drawdown column agrees. VYM fell about 57 percent peak to trough; VTI fell about 55.5 percent. The dividend fund declined slightly more than the total market it was supposed to cushion you against.
#Why the defensive reputation failed exactly here
The reason is specific and, in retrospect, obvious. A high dividend yield screen in 2007 selected heavily for financial companies. Banks and insurers were among the largest, most consistent dividend payers in the market, and a fund ranking stocks by forecast yield loaded up on precisely the sector that was about to become the epicenter of the crisis.
Worse, the screen’s own mechanism made this progressively more true as the crisis developed. Yield is the dividend divided by the price. As financial stocks fell through 2007 and into 2008, their yields mechanically rose, which made them look more attractive to a yield-ranked index at each rebalance. The fund was structurally inclined to increase exposure to falling banks right up until those banks cut their dividends.
This is the general failure mode of yield-only screening, described in more detail on the SCHD versus VYM comparison. SCHD’s quality overlay exists specifically to address it, but SCHD did not launch until 2011 and therefore cannot be tested against this period at all.
#What dollar-cost averaging did here
The absolute results deserve attention independent of the comparison. Both plans ended below what was contributed, but only modestly: down about 4 percent for VTI and about 7 percent for VYM, against underlying declines of more than 55 percent.
That gap between a 55 percent fund decline and a 4 percent plan decline is what a contribution plan does. Money invested in 2007 was devastated. Money invested in late 2008 and early 2009 bought shares near the bottom, and by December 2009 those shares had already recovered substantially. The plan’s average purchase price ended up far below the starting price.
An investor who stopped contributing during the panic, which is what many people actually did, would have missed exactly the purchases that rescued the result. This is the strongest practical argument for automating contributions, and it is visible more clearly here than in any other window on the site.
#What the window excludes
This simulation ends December 31, 2009. The recovery was well underway by then but far from complete, and both funds continued rising for years afterward. A plan that ran to 2012 or 2015 shows strongly positive results from the same starting point.
The three-year window is deliberate: it isolates the crisis rather than letting a long subsequent bull market absorb it. That is the right frame for testing a defensiveness claim, but it is the wrong frame for judging whether contributing through the crisis was worthwhile. Extend the end date and the answer to the second question becomes emphatically yes.
#What to test
- Extend the end date to 2012, then 2015, keeping the same 2007 start. Watch how quickly a plan that looked like a failure at the end of 2009 turns around.
- Run the same window with contribution frequency set to lump sum. A single investment in October 2007 produces a dramatically worse result than the contribution plan.
- Add VIG, the dividend appreciation fund, which screens on dividend growth rather than yield and held far fewer financials.
- Compare this drawdown pair against the 2020 pair in the SCHD versus VYM comparison. Different crisis, different sector damage, different winner.
Change the contribution amount, schedule, or date range and re-run this comparison against the same historical data.
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