Two things that exchange-traded funds offer investors is diversification and value. Many ETFs offer their services at rock-bottom prices, and recently, Charles Schwab has fought back against fund rival Vanguard by slicing its expenses on its proprietary ETFs to the bone. Schwab U.S. Dividend Equity (NYSEMKT:SCHD) is just one example of how Schwab is undercutting Vanguard where it hurts, with cheaper expense ratios than the index pioneer's Vanguard High Dividend Yield ETF (NYSEMKT:VYM). What investors want to know, though, is which one delivers the better performance, both in terms of total return and in the dividend income that they want to see. The following look shows how dividend ETFs have behaved during the recent market correction and whether the Schwab or Vanguard offering would be a smarter pick right now.
Valuation and stock performance
Over the past year, Vanguard High Dividend Yield has shown a predilection for being slightly less volatile than Schwab U.S. Dividend Equity. When you look at the past 12 months, the Schwab ETF has a slight performance lead, with a total return of 14% edging out Vanguard's 13% gains. Yet as volatility in the market has ramped up, Vanguard's fund has held up better, posting a 1% gain year to date versus a slight loss for its Schwab counterpart.
ETFs don't have valuation-based metrics per se, but you can look at the stock holdings within each fund to see how they compare. Dividend stocks have generally been fairly expensive lately, although the stocks that these two ETFs hold aren't quite at as lofty a valuation as some of their counterparts. Vanguard's stocks have a price-to-earnings ratio of just over 18. Schwab's ETF holds stocks that trade at closer to 16 times trailing earnings.
Dividend ETFs pay out the dividends from the dividend stocks they hold on a quarterly basis. Both the Vanguard and Schwab dividend ETFs do a good job of delivering above-market dividend income to their shareholders. Based on figures used by the Securities and Exchange Commission, the Vanguard ETF has a current dividend yield of 3.06%, while Schwab is only minimally lower at an even 3%.
For those who prefer to see dividend growth, the Schwab offering has been more aggressive in boosting its payouts over time. In 2013, the ETF paid out just over $0.90 per share, but over the past 12 months, that's grown to more than $1.28 per share, for a gain of more than 40%. The Vanguard ETF has paid roughly $2.45 per share since mid-2017, up about 40% from the $1.75 per share it paid in 2013. The two ETFs are very similar in the way they've rewarded their investors over the past several years.
How these funds pick their stocks
It's pretty obvious that any dividend ETF will invest in dividend-paying stocks in order to match up to investor expectations. Yet even with that as a given, there can be big disparities between any two ETFs that focus on dividends.
For instance, consider the following differences between the Vanguard and Schwab funds:
- Schwab's ETF holds only about 100 stocks, compared to roughly 400 for Vanguard.
- Schwab's portfolio is a lot more heavily weighted to tech and consumer stocks, while Vanguard has a somewhat more diversified set of weightings across multiple sectors that also include financials, healthcare, and industrials.
- Schwab's methodology requires the fund to weigh both dividend yields and track records of consistent dividend payments, while Vanguard focuses almost exclusively on above-average dividend yields.
Yet the two funds do have some big similarities. Schwab's expense ratio of 0.07% is just a hair less than the 0.08% that Vanguard charges. They've also been equally efficient from a tax perspective, using the advantages of the exchange-traded fund framework to avoid having to make the capital gains distributions that most regular mutual funds have to pay.
You can't go wrong
It's pretty much impossible to pick a winner between these two strong dividend ETFs. Both of them are inexpensive and offer good exposure to dividend stocks. With commission-free trading available to those with brokerage accounts with their respective companies, the answer to which one of these is a better buy might well depend on whether you already have a relationship with Vanguard or Schwab -- or which one you're likely to prefer for all of your financial needs.