With tech stocks and the S&P 500 generating huge returns over the past few years, there has been limited interest in dividend stocks. But that is starting to change in the early part of 2026 as investors get a little nervous about the health of the economy and the geopolitical backdrop.
When investors look to add a high-yield dividend equity exchange-traded fund (ETF) to their portfolio, many turn to the Vanguard High Dividend Yield ETF (VYM +0.11%) and the Schwab U.S. Dividend Equity ETF (SCHD 0.45%). Both do a good job at delivering steady and predictable income, but they go about building their portfolios in very different ways.
In my opinion, one is clearly a better choice than the other.
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High-yield dividend ETFs: Vanguard vs. Schwab
The Vanguard High Dividend Yield ETF tracks the FTSE High Dividend Yield Index. It essentially starts out with a broad U.S. equity universe, ranks the stocks within that universe by indicated dividend yield, and includes the top half of yields in the final portfolio. Given that the fund holds more than 560 stocks, it's not terribly selective and ends up being pretty bland.
NYSEMKT: VYM
Key Data Points
The Schwab U.S. Dividend Equity ETF follows the Dow Jones U.S. Dividend 100 Index. Its selection involves looking at a number of criteria, including dividend payment history, dividend yield, and fundamentals, such as cash flows, debt, and return on equity. The stocks with the best combination of these criteria make the final portfolio.
NYSEMKT: SCHD
Key Data Points
The Schwab ETF's selection criteria are much more robust and incorporate elements of dividend growth, dividend quality, and high yield throughout its process. Its use of market cap weighting isn't ideal (I'd prefer to see a score-based weighting system used instead), but there's little question that its screening process does a good job of selecting the best of the best dividend stocks.
The Vanguard ETF's method of selecting the top half-yielding stocks does end up producing an above-average yield, but there are weaknesses beyond that. There's no consideration of dividend health or sustainability in the process, leaving it vulnerable to including potential dividend cutters or yield traps. Like the Schwab ETF, it uses market cap weighting, which dilutes the fund's full yield potential. Case in point: Its top holding is Broadcom, which somehow qualified for inclusion despite a yield of less than 1%.
The Schwab U.S. Dividend Equity ETF is the clear winner
I'm a fan of funds that use some combination of strategies to act as a cross-check against each other in order to exclude bad actors. The Schwab ETF does that, which in my opinion makes it a better high-yield equity play.
Granted, its performance has been miserable over the past few years. But that's a product of the fund's investment style being out of favor. Nothing about the strategy itself has changed. Its long track record of success prior to the past few years shouldn't be discounted.
The Schwab U.S. Dividend Equity is the better buy.
