The S&P 500 fell 4.4% on Thursday, its steepest one-day decline since April 2025, while the Nasdaq dropped 5.5% and moved more than 10% below its recent record high, entering correction territory. Whether the selloff develops into a deeper decline remains uncertain. But high valuations are drawing attention: the S&P 500’s cyclically adjusted price-to-earnings ratio, or CAPE, recently closed above 41—more than twice its long-term average in the teens and near levels seen before the dot-com bust. Even established dividend payers can look expensive in that setting.
Buffett’s discipline amid elevated valuations
Since 1929, the S&P 500 has experienced 13 bear markets, each involving a decline of at least 20%. They have occurred roughly once every seven years on average. The last was in 2022, but that historical interval offers no reliable timetable for the next downturn. A high CAPE signals optimistic pricing; it does not predict when a crash will happen.
Berkshire Hathaway Chairman Warren Buffett wrote in his 1986 letter to shareholders: “Be fearful when others are greedy and greedy when others are fearful.” The principle is not a call to pinpoint a market peak. It is a reminder to stay disciplined when investor sentiment is buoyant and valuations are expanding. And elevated prices are not confined to AI-related stocks: shares of companies often regarded as dependable dividend payers can also become expensive.
Coca-Cola, one of Buffett’s best-known holdings, has gained about 40% over the past year. Its dividend yield has meanwhile fallen from 3% to 2.2%. As of November 6, the stock traded at about $96 a share, at nearly 29 times earnings, compared with 23.5 times for the S&P 500. The quality of a business and the price paid for its shares are separate considerations. As a stock rises, its yield for new buyers falls.
Setting a target price from the dividend yield
One approach for dividend investors is to compare a stock’s current yield with its own history. If a rising share price pushes the yield well below past levels, investors can reassess whether to add to the position without concluding that they should sell a high-quality company they already own.
Coca-Cola’s annual dividend is $2.12 a share. An investor seeking a 3% yield would get an indicative purchase price of about $71—roughly 25% below the recent price of $96. That calculation shows how a desired yield relates to an entry price; it does not mean the stock will reach that level.
Investors can also draw up a shortlist of five to eight high-quality dividend companies they would be willing to hold over the long term, then calculate prices that correspond to their desired yields. Setting those conditions in advance can help avoid making decisions on the fly during a market decline. Dividend payments and business fundamentals can change, however, so target prices need to be reviewed as circumstances evolve.
Rethinking automatic dividend reinvestment
When valuations are high, investors may also want to review whether to keep automatically reinvesting dividends in the same stock. Pausing reinvestment in some holdings allows cash to accumulate for potential future purchases without selling existing shares. Berkshire has taken a much larger-scale cash-reserve approach: at the end of the second quarter, it held $364.7 billion in cash.
Cash provides flexibility, but it does not mean a market decline is imminent or that holding cash carries no opportunity cost. For dividend investors, the practical questions are whether current holdings are fairly valued and whether their reinvestment plans still make sense—not whether one market pullback alone warrants a change.
Dividend stocks have not always outperformed in downturns
Historical performance shows that some high-quality dividend stocks have held up better than the broader market during selloffs, but they have not done so every time. During the two years following the dot-com bust, the S&P 500 fell 47%, while the S&P 500 Dividend Aristocrats Index gained 4.7%, outperforming the broader index by 51.4 percentage points. During the global financial crisis, the Dividend Aristocrats Index fell 47.2%, less than the S&P 500’s 55% decline.
The pattern reversed during the 2020 pandemic bear market, when the Dividend Aristocrats Index lagged the S&P 500 by about 1.4%. Dividend stocks are not immune to market shocks, and a high purchase price can still weigh on returns. With the CAPE elevated and markets recently retreating sharply, the timing of any further downturn remains unknown. Dividend yields, valuations and cash plans are among the measurable factors investors can continue to monitor.