Better Buy: This High-Yield ETF or a Classic S&P 500 Index Fund?

Key Points

• S&P 500 index funds have proven to be solid long-term investments.

• The Schwab U.S. Dividend ETF offers a higher current dividend yield.

• Dividend growth stocks like the ones SCHD holds have historically delivered higher returns with less volatility compared to the S&P 500.

• 10 stocks we like better than Schwab U.S. Dividend Equity ETF ›

There's a lot of debate among investors on whether it's better to invest in a plain vanilla index fund tracking the S&P 500 or the popular Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). Those favoring the high-yield ETF point to its payout as a great way to generate passive income. Meanwhile, those arguing for an index fund, such as the Vanguard S&P 500 ETF, will highlight its higher returns in recent years.

Here's a closer look at these two investment options to help you decide which is the better buy for your situation.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More »

Image source: Getty Images.

Balancing income and growth

One of the key attractions of the Schwab U.S. Dividend Equity ETF is its attractive dividend income. The fund currently has a 3.9% yield based on its recent price and distributions over the past 12 months. That's more than three times higher than the S&P 500's dividend yield, which currently stands at 1.2%, approaching its record low.

To put things in perspective, every $1,000 invested in the Schwab U.S. Dividend Equity ETF would produce about $39 of annual dividend income. That compares to only $12 of annual dividend income per $1,000 invested in an S&P 500 Index Fund, such as the Vanguard S&P 500 ETF. That larger payment makes the fund ideal for those seeking to generate passive income.

However, the Schwab fund doesn't just focus on yield. It tracks the Dow Jones U.S. Dividend 100 Index, which focuses on companies that pay quality and sustainable dividends that steadily rise. Dividend growth is one of the four quality factors the index screens for when updating its holdings. At its annual reconstitution in March, the fund's updated list of 100 holdings had delivered an average dividend growth rate of 8.4% over the past five years. That's faster dividend growth than the S&P 500, which has averaged around 5% over the past five years.

Returns and volatility

Dividend growers have historically delivered powerful returns over the long term. During the past 50 years, dividend growers have achieved an average annualized total return of 10.2%, according to data from Ned Davis Research and Hartford Funds. That has outperformed the average stock market return of 8% during the past half century.

While dividend growth stocks have been standout performers over the very long term, the group has underwhelmed in more recent years. As a result, the Schwab U.S. Dividend Equity ETF has underperformed the S&P 500 and the ETFs that track it:

Data source: Ycharts.

However, while the ETF has delivered lackluster returns over the past one- and three-year periods, its returns over the longer term have been much higher. They align well with the long-term returns of dividend growth stocks. Meanwhile, the S&P 500's returns have been significantly above its long-term historical average, which is 9% over the past 30 years and 8% over the last 50 years. This data suggests that the Schwab U.S. Dividend Equity ETF could outperform the S&P 500 over the longer term as the market reverts closer to its historical average return.

Another factor to consider is volatility. The S&P 500's beta is 1.0, while dividend growers have historically had a beta of 0.88. The lower beta implies that these stocks tend to be less volatile than the S&P 500. Investors who don't like volatility will want to invest in a less volatile fund.

Two solid options

For most investors, a classic S&P 500 index fund, such as the Vanguard S&P 500 ETF, is a great choice. However, the Schwab U.S. Dividend Equity ETF offers a much higher current yield, which will appeal to income-focused investors. Furthermore, although its returns have lagged behind the S&P 500 in recent years, it could outperform that index in the future, given the historical returns of dividend growth stocks compared to the S&P 500. Dividend growers also tend to be less volatile than the S&P 500. Because of these factors, the fund is a better investment for those seeking higher income, lower volatility, and greater long-term total return potential.

Should you invest $1,000 in Schwab U.S. Dividend Equity ETF right now?

Before you buy stock in Schwab U.S. Dividend Equity ETF, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Schwab U.S. Dividend Equity ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $674,281!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $1,050,415!*

Now, it’s worth noting Stock Advisor’s total average return is 1,058% — a market-crushing outperformance compared to 179% for the S&P 500. Don’t miss out on the latest top 10 list, available when you join Stock Advisor.

See the 10 stocks »

*Stock Advisor returns as of July 15, 2025

Matt DiLallo has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.