Dividend income investing usually isn't as simple as just picking the best dividend stocks. Your personal goals and income requirements can have a big impact on whether you focus on dividend growth or high yield.
Dividend growth stocks tend to have greater durability and sustainability, but can come with low yields. High yield stocks can help solve the income problem, but they can also turn into yield traps that damage total returns. That makes the argument between the Vanguard Dividend Appreciation ETF (VIG -0.37%) and the Schwab U.S. Dividend Equity ETF (SCHD +0.18%) an interesting one.
Is the current market environment built more for classic dividend growth or one that focuses on high yield with a quality tilt?
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Dividend growth vs. high yield
The Vanguard Dividend Appreciation ETF tracks the S&P U.S. Dividend Growers Index. It targets large-cap stocks that have grown their annual dividend for at least 10 consecutive years. It eliminates the top 25% of yields in order to avoid some of those potential yield traps and weights the final portfolio by market cap.
NYSEMKT: VIG
Key Data Points
There's good and bad in this strategy. On the plus side, the elimination of high-yielders makes this more of a pure dividend growth play, even if it comes at the expense of income. On the downside, the market cap-weighting gives preference to the biggest companies regardless of yield or dividend history.
The Schwab U.S. Dividend Equity ETF follows the Dow Jones U.S. Dividend 100 Index. It targets companies of all sizes that have paid (but not necessarily grown) dividends over the past decade and scores them using metrics such as return on equity (ROE), cash flow to debt, dividend growth rate, and yield. The 100 stocks with the best combination of these factors make the final cut.
NYSEMKT: SCHD
Key Data Points
This methodology produces a portfolio heavily tilted toward the yield factor, but filled with higher-quality stocks. This is, in my opinion, an advantageous way of building the portfolio. Selecting purely by yield can be dangerous because it gives no consideration to sustainability. By selecting stocks only backed by quality balance sheets helps address that problem.
Which ETF is the better buy?
The Vanguard Dividend Appreciation ETF has benefited from its market-cap-weighting strategy because it's made Broadcom, Microsoft, and Apple its top three holdings. That's helped past performance relative to other dividend ETFs, but what happens if the market keeps rotating away from tech as it's begun to do in 2026?
The Schwab U.S. Dividend Equity ETF has lagged mightily over the past three years, but that's a function of its strategy being out of favor, not the strategy itself. Overall, I really like that it incorporates dividend growth history, dividend quality, and high yield into its strategy. That really helps it identify a portfolio of top-tier stocks.
I believe that the Schwab ETF is the better buy right now. With questions surrounding the direction of the economy, the health of the labor market, and the geopolitical backdrop, we could see a continuation of the current rotation away from tech and into more defensive issues. Its portfolio is much better positioned for that type of scenario.
