Over the past decade, the Schwab U.S. Dividend Equity ETF (SCHD +2.06%) has generated an average annual return of 12.4%. The Vanguard Dividend Appreciation ETF (VIG +0.78%) has returned 12.8% annually over the same time frame.

That's not much of a difference. But one shouldn't see similar performance records and assume the funds themselves are similar or even interchangeable.

These two dividend ETFs take very different approaches to portfolio construction. There's very little overlap between the two portfolios, and sector compositions reveal some very distinct differences in tilts.

SCHD screens for strong balance sheet health and high yield, while giving some consideration to dividend growth. VIG screens entirely based on dividend growth history.

Each has its distinct advantages and disadvantages. But if I'm looking to hold just one of these funds over the next 20 years, I believe one definitely has a better chance at outperforming.

Source: Getty Images.

The case for SCHD

The Schwab U.S. Dividend Equity ETF tracks the Dow Jones U.S. Dividend 100 Index. It screens U.S. large-cap stocks by factors including cash flow-to-debt, return on equity, dividend yield, and dividend growth rate. The 100 stocks demonstrating the best combination of these factors qualify for inclusion in the final portfolio.

The current top five holdings for SCHD:

1. Abbott Laboratories: 4.5%

2. UnitedHealth Group: 4.5%

3. Merck: 4.4%

4. Amgen: 4.2%

5. Procter & Gamble: 4.2%

When buying a dividend ETF, or any ETF for that matter, you want a selection strategy that tries to identify and invest in the best of the best. That's what this ETF does. By considering dividend growth, yield, and financial health, all screens act as cross-checks against each other.

High yields may get removed because they're not demonstrating the balance sheet quality to back it up. Dividend growers may get screened out because they've only increased the dividend minimally enough to keep the streak growing. All qualifying stocks instead meet stringent criteria across the board.

The case for VIG

VIG tracks the S&P U.S. Dividend Growers Index, which targets companies that have increased their annual dividend for at least 10 consecutive years. The final portfolio gets weighted by market cap.

The current top five holdings for VIG:

1. Broadcom: 4.5%

2. Apple: 4.2%

3. Eli Lilly: 4.1%

4. JPMorgan Chase: 3.6%

5. Microsoft: 3.5%

This ETF is a dividend growth investment, but it does a couple of things that skew it away from what you might consider a "traditional" dividend growth fund.

First, its requirement of 10 years of dividend growth is lower than you see from other funds. The ProShares S&P 500 Dividend Aristocrats ETF, for example, requires 25 years. This allows for the inclusion of "emerging" dividend growers, especially those in the tech sector, that might not get included elsewhere. It also makes no provision for a stock's yield. That's how you get Broadcom, Microsoft, and Apple in the portfolio despite having yields of less than 1%.

The market cap-weighting methodology also lifts these names to the top of the portfolio. The Vanguard Dividend Appreciation ETF is a dividend ETF by name and strategy. But the methodology gives it much more of a growth tilt than you might expect.

Why VIG beats SCHD over time

While we can debate the merits of stock selection strategy, the question is about which can build more wealth over the next 20 years.

With its comparatively larger growth and tech tilt, I think the answer is the Vanguard Dividend Appreciation ETF.

I do believe that the Schwab U.S. Dividend Equity ETF is the better dividend ETF overall. But VIG's portfolio simply has higher growth potential over the long term.