Is SCHD a Better Dividend ETF Than VIG?

Comparing Schwab U.S. Dividend Equity ETF (NYSEMKT:SCHD) to Vanguard Dividend Appreciation ETF (NYSEMKT:VIG) reveals two distinct strategies: one prioritizes current high yields while the other focuses on consistent dividend growth and technology exposure.

Investors often weigh these two funds when seeking exposure to reliable American companies. Vanguard Dividend Appreciation ETF targets large-capitalization companies with decade-long streaks of dividend increases, whereas Schwab U.S. Dividend Equity ETF focuses on fundamental strength and sustainability, resulting in two very different ways to own the dividend-paying market. Understanding whether you value immediate yield or long-term growth is central to choosing between these two exchange-traded funds.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year monthly returns. The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

While the Vanguard fund is the more affordable option with its 0.04% expense ratio, the Schwab fund remains competitive at 0.06%. The 1.70 percentage point yield gap may attract those prioritizing cash flow, whereas VIG focuses on those who prefer the growth of that payout over time. The Schwab fund provides a lower beta of 0.68, suggesting it has historically been less volatile than the broader market compared to the Vanguard fund's beta of 0.82.

Performance & risk comparison

What's inside

Schwab U.S. Dividend Equity ETF focuses on 103 holdings, tracking the Dow Jones U.S. Dividend 100 Index. Its largest positions include Texas Instrument Inc (NASDAQ:TXN) at 6.39%, Qualcomm Inc (NASDAQ:QCOM) at 6.22%, and Unitedhealth Group Inc (NYSE:UNH) at 5.50%. The fund, which was launched in 2011, paid $1.06 per share over the trailing 12 months. It prioritizes technology at 19.00%, with consumer defensive and healthcare each representing 18.00% of the portfolio, using fundamental screening to identify companies with high cash flow and return on equity.

In contrast, Vanguard Dividend Appreciation ETF maintains a broader portfolio of 338 holdings, tracking the S&P U.S. Dividend Growers Index. Its largest positions include Broadcom Inc (NASDAQ:AVGO) at 5.42%, Apple Inc (NASDAQ:AAPL) at 4.58%, and Microsoft Corp (NASDAQ:MSFT) at 4.28%. The fund was launched in 2006 and has paid $3.45 per share over the trailing 12 months. It is heavily tilted toward technology at 29.00%, followed by financial services at 20.00% and healthcare at 17.00%, excluding the highest-yielding stocks to capture companies with the strongest capacity to increase dividends.

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What this means for investors

These are two very different dividend ETFs. One, the Schwab U.S. Dividend Equity ETF, is more focused on the dividend yield, with a 3.25% distribution yield, one of the highest among dividend ETFs. The Vanguard Dividend Appreciation ETF only pays a yield that is less than half of SCHD’s at 1.53%.

SCHD has also been a better performer this year, up some 16% year-to-date compared to VIG, which has returned about 7%.

But VIG has been the much better long-term performer. As it focuses on dividend growers, it includes a lot of technology stocks that have rising dividends, but with lower yields. As the top three holdings — Broadcom, Microsoft, and Apple — indicate, these are not exactly dividend stocks. But they are three of the best growth stocks on the market.

This has allowed the VIG ETF to post strong long-term returns. However, the outperformance over SCHD is not that great — 11% for VIG to 8.7% for SCHD over the past five years and 13% for VIG to 12% for SCHD over the past 10 years.

Ultimately, if you are looking for excellent dividends and a good portfolio diversifier, SCHD is the better option.

Dave Kovaleski has positions in Apple. The Motley Fool has positions in and recommends Apple, Broadcom, Microsoft, Qualcomm, Texas Instruments, and Vanguard Dividend Appreciation ETF. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.