VTV

Worried About a Stock Market Correction? 1 Vanguard ETF, 1 Dividend King, and 1 "Magnificent Seven" Stock to Buy Now

Last Thursday, the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average all hit all-time highs, with the Dow crossing the 40,000 level for the first time in its over-125-year-old history.

The stock market has overcome myriad challenges over the past six years, including the U.S.-China trade war, COVID-19 pandemic, election uncertainty, supply chain challenges, and now inflation. Despite concerns about slowing consumer spending, Walmart beat earnings estimates last Thursday, which confirmed that consumers may be stretched, but top retailers are still putting up excellent results.

Some investors may look at the state of the stock market and think that something has to eventually break given that there are so many cracks that haven't gone away. But experienced investors know that timing the market isn't a good long-term strategy since it's hard to know when to get back in once you've left.

A better approach is to target particularly strong companies that can endure a correction. Here's why the Vanguard Value ETF (NYSEMKT: VTV), Coca-Cola (NYSE: KO), and Microsoft (NASDAQ: MSFT) are all worth buying even if the market sells off.

A person sitting down drinking a can of soda through a straw.

Image source: Getty Images.

A balanced ETF that focuses on proven companies

The Vanguard Value ETF is a great choice if you want to continue putting new capital to work in the market but want to avoid being overly aggressive. It focuses on companies that make a lot of money now rather than ones that could make a lot of money in the future.

By comparison, the Vanguard Growth ETF includes all of the "Magnificent Seven" stocks, a term used to describe seven industry-leading growth stocks. The Vanguard Value ETF doesn't include any of the Magnificent Seven. Its largest holdings are companies like Berkshire Hathaway, Broadcom, JPMorgan Chase, UnitedHealth, and ExxonMobil. The focus is on value and income.

The fund's price-to-earnings (P/E) ratio is just 18.3, and the yield is 2.5% -- which is a significant discount to the S&P 500's 27.5 P/E ratio. The fund also has a mere 0.04% expense ratio, which is negligible even if you're investing thousands of dollars into the ETF.

All told, it's a good way to achieve diversification by targeting the stable, proven pockets of the market rather than red-hot growth stocks.

An income stock that is resistant to recessions

Coca-Cola is a top dividend stock that you can count on in a market correction due to the size of its dividend and its ability to pay it. Coke yields 3.1%, which generates noticeably more passive income compared to the S&P 500, which yields just 1.3%.

Coke is a stodgy business with limited growth prospects, and unsurprisingly, it has underperformed the market in recent years. But the venerable company is showing signs of returning to meaningful top- and bottom-line growth. Coke is also a Dividend King, having achieved 62 consecutive years of dividend increases in February when it announced a 5.4% raise, bringing the quarterly dividend to $0.485 per share.

I fully expect Coke to underperform the broader market over the long term due to the nature of its business model. But Coke has done an excellent job avoiding big mistakes. It doesn't get overly tempted by opportunities. Instead, it stays mainly within the non-alcoholic beverage category -- which is noticeably different from its peer PepsiCo, which is in both beverages and snacks, among other things.

There's a skill to being remarkably mediocre, and Coke has it in spades. The stock isn't overpriced, with a P/E ratio of 25.4 despite hovering around an all-time high. It's a good safe stock to pick up shares of if you want to stay invested in the stock market but are focused on capital preservation rather than capital appreciation.

Microsoft is built to endure volatility

At first glance, Microsoft seems like a strange pick if you think there will be a stock market correction. The stock is just a few percentage points down from its all-time high, and is up a staggering 234% over the last five years.

Stock market downturns happen for a variety of reasons. But they are usually driven by uncertainty and slower or even negative earnings growth. Instead of thinking about whether a stock is overvalued, it's better to imagine how the business (not the stock) would perform during a slowdown.

Microsoft isn't the cheapest "Magnificent Seven" stock, but it is arguably the best-positioned to take market share during industry downturns due to its diversified business model and strong balance sheet.

Microsoft generates revenue from a variety of different, high-margin business units, including:

  • Microsoft Intelligent Cloud consists of Microsoft Cloud, Azure, GitHub, and cloud services.
  • Productivity and Business Processes include Microsoft Office for commercial and consumer customers (including artificial intelligence solutions like Microsoft Copilot subscriptions), LinkedIn, Office services, and dynamic business solutions.
  • More Personal Computing, a segment that includes the Windows operating system, gaming hardware through Xbox, and first-party content through Activision Blizzard. It also includes search and news advertising like Bing, Microsoft News, and Microsoft Edge.

All told, Microsoft does a lot of very different things very well. Here's a look at its results for the nine months ended March 31. Compared to the nine months ended March 31, 2023, revenue grew 15.8%, and operating income grew 26.8%.

Metric

Intelligent Cloud

Productivity and Business Processes

More Personal Computing

Revenue

$76.9 billion

$57.4 billion

$46.1 billion

Operating income

$36.7 billion

$30.4 billion

$14.4 billion

Operating margin

47.8%

53%

31.2%

Data source: Microsoft.

Microsoft's operating income is growing at a faster rate than its sales, which is boosting margins across the board. High margins provide the wiggle room needed to cut prices at the expense of profitability to boost sales when end markets are weak. Whereas a competitor with lower margins doesn't have as much flexibility.

This is an extremely profitable business that generates a ton of cash to pay a growing dividend, repurchase stock, and fuel organic growth. But Microsoft would still be an excellent business even if it wasn't growing as quickly or its margins were lower. It's the kind of business likely to emerge from a downturn relatively stronger than where it started, even if its near-term results took a hit.

The right way to navigate a market sell-off

Even if there is a stock market correction, that doesn't mean it's a good idea to pile into ultra-safe stocks if they don't suit your risk tolerance. If you have a multi-decade time horizon, it's important to make sure you are exposed to companies that benefit from the growth of the economy.

In other words, getting too defensive can lead to lower-than-expected gains over time since many low-growth companies tend to underperform the S&P 500 over prolonged bull markets.

Finding businesses that are well-positioned to navigate an economic decline, even if they take a short-term hit, are the ones that are worth buying and holding through periods of volatility.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, JPMorgan Chase, Microsoft, Vanguard Index Funds-Vanguard Growth ETF, Vanguard Index Funds-Vanguard Value ETF, and Walmart. The Motley Fool recommends Broadcom and UnitedHealth Group and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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