The Dividend ETF I'd Buy Today Instead of VYM
Key Points
The Vanguard High Dividend Yield ETF holds more than 600 stocks and isn't focused enough to provide a true high yield.
The Schwab U.S. Dividend Equity ETF targets dividend growth, balance sheet quality, and yield in its selection process.
It has produced better results and, more importantly, does a better job of picking stocks for its portfolio.
- 10 stocks we like better than Schwab U.S. Dividend Equity ETF ›
The Vanguard High Dividend Yield ETF (NYSEMKT: VYM) is very simple in its construction. It starts with a U.S. large-cap stock universe, picks the top half based on forecasted dividend yield, and weights them by market cap.
It does its job reasonably well enough. Its 2.2% yield is more than double that of the Vanguard S&P 500 ETF (NYSEMKT: VOO). But it's also only average within the high yield category, and the fact that it owns more than 600 stocks means it's rather bland and unfocused.
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Dividend investors can do better.
Can I offer you a dividend ETF with a 3.3% yield, a better quality screen, and more consideration of a company's dividend growth history? If that sounds more appealing, the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) belongs in your portfolio.
Image source: Getty Images.
How SCHD chooses its 100 stocks
This ETF tracks the Dow Jones U.S. Dividend 100 Index. It searches for companies with 10 or more consecutive years of dividend payments. Qualifying stocks then get assessed on four fundamental metrics: cash flow-to-debt, return on equity (ROE), dividend yield, and five-year dividend growth rate. The top 100 stocks with the best combination of these measures make the portfolio.
The Schwab U.S. Dividend Equity ETF is one of the few that considers all three primary dividend pillars: dividend growth, dividend quality, and high yield. Most consider one or maybe two. This fund's assessment of all three allows it to choose the "best of the best" dividend stocks for investors.
SCHD: Performance and key metrics
| Metric | SCHD | VYM |
|---|---|---|
| Expense ratio | 0.06% | 0.04% |
| Dividend yield | 3.3% | 2.2% |
| 2026 year-to-date return | 18.1% | 10.2% |
| 10-year annualized total return | 12.6% | 11.6% |
| # holdings | 103 | 608 |
| Top sectors | Consumer staples (19%), healthcare (19%), energy (17%) | Financials (20%), tech (15%), industrials (14%) |
Sources: Schwab, Vanguard.
The Vanguard High Dividend Yield ETF narrowly wins on expense ratio, but it trails on just about everything else. It significantly lags the Schwab ETF on both short-term and long-term performance. Its yield is inferior. It's got greater diversification in terms of the number of stocks held within the portfolio, but that doesn't lead to any significant sector overweights.
The Schwab U.S. Dividend Equity ETF's overweight in energy was a big catalyst for outperformance over the past year, and that overweight continues to carry it today. If the Iran war finds a resolution, oil prices could sink again, and energy stocks would give back a lot of those gains. In that case, the catalyst becomes the anchor.
It doesn't appear that any resolution is coming soon. That makes the fund look more favorable in the near term due to its positioning, and in the long term based on its more robust selection strategy.
The Schwab U.S. Dividend Equity ETF is a clear upgrade over the Vanguard High Dividend Yield ETF.
Should you buy stock in Schwab U.S. Dividend Equity ETF right now?
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David Dierking has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool has positions in and recommends Vanguard High Dividend Yield ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
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