The Schwab U.S. Dividend Equity ETF (SCHD +0.18%) checks all the boxes that investors would want in a dividend ETF. It screens dividend stocks for high-quality balance sheets, above-average yield, and dividend growth history. It's one of the very few funds that considers all three of these factors in a single strategy.
The Vanguard Dividend Appreciation ETF (VIG +0.65%) takes a simpler approach. It targets large-cap stocks with 10+ consecutive years of annual dividend growth while avoiding the highest-yielding stocks to help limit risk.
Both are reasonable long-term strategies, but they definitely produce different portfolios with different risk profiles and different results. So which is the better choice? Let's dive in and find out.
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The Vanguard Dividend Appreciation ETF wins on recent performance. Its 10-year average annual return of 13% modestly beats the 12.7% average of the Schwab U.S. Dividend Equity ETF. If you're choosing a dividend ETF to invest in based on results only, VIG comes out ahead.
The thing investors should be looking at more closely is why the Vanguard Dividend Appreciation ETF has come out ahead. The answer to that will help determine which of these top-tier dividend ETFs is better for you.
Two dividend ETFs that are built very differently
Dividend payers generally have a reputation as more conservative, more mature businesses that are better suited for folks closer to retirement. A lot of them are like that, but many aren't. A newer development over the past decade is that several of the big tech companies have begun paying dividends, potentially opening them up to a whole new universe of investors.
Similarly, dividend ETFs aren't one-size-fits-all. Their stock-targeting strategy almost entirely explains why some are more aggressive than others and how it affects returns. Putting the Schwab U.S. Dividend Equity ETF and the Vanguard Dividend Appreciation ETF side-by-side clearly shows us how these two portfolios are different.
| Metric | SCHD | VIG |
|---|---|---|
| Expense ratio | 0.06% | 0.04% |
| Dividend yield | 3.3% | 1.4% |
| 1-year return | 25.5% | 11.4% |
| 5-year return (ann.) | 9.4% | 10.6% |
| 10-year return (ann.) | 12.7% | 13% |
| Top 3 sectors | Healthcare (21%), Consumer Staples (20%), Energy (14%) | Tech (26%), Financials (22%), Healthcare (18%) |
| Top 3 holdings | Texas Instruments (4.7%), Qualcomm (4.6%), Procter & Gamble (4.2%) | Microsoft (4.7%), Apple (4.5%), Broadcom (4.3%) |
Data source: Fund fact sheets.
Ignore the returns and expense ratios for a moment and focus on the holdings. SCHD has a more defensive mix of sectors that tend to perform better during tougher market environments. Even Texas Instruments and Qualcomm aren't the high-growth tech names that the market is focused on right now. VIG, on the other hand, has tech as its top sector holding. The top three positions are some of today's most popular tech mega-caps. It's clearly the more growth-oriented of the two funds.
The Vanguard Dividend Appreciation ETF has a slightly better track record, but that could be because it's been more exposed to the tech rally than its dividend ETF peers. The Schwab U.S. Dividend Equity ETF, in contrast, has significantly outperformed over the past year as the market has broadened substantially beyond just tech.
NYSEMKT: VIG
Key Data Points
Both strategies still have merit
I want to point out that neither of these strategies is necessarily better than the other. They obviously have different ways of targeting dividend stocks, and that's OK. It just means that investors need to be aware of what they really want.
The Vanguard Dividend Appreciation ETF has more of a "growth plus income" profile. The yield is a much smaller factor, as evidenced by the below-average 1.4% yield. But it has higher capital growth potential than many other dividend ETFs. Therefore, it's probably appropriate for people who are a little more risk-tolerant and have more time to ride out the highs and lows.
NYSEMKT: SCHD
Key Data Points
The Schwab U.S. Dividend Equity ETF is more of what you might expect from a traditional dividend ETF. It's more defensively tilted and focuses on well-established, high-quality stocks. Its 3.3% yield means it's more appropriate for income seekers and/or those looking to mitigate some downside risk.
Both strategies have historically worked very well, but they're appropriate for different types of investors. That's a big reason why investors shouldn't lock in on the yield number as the deciding factor in what dividend ETF to choose. Portfolio composition, risk levels, and personal objectives all matter much more.
