We all want the best possible returns from our investments. So, it is understandable why more investors are looking into ETFs that pay very good dividends. A diversified portfolio is good, but a diversified portfolio with impressive dividend income is way better.
This article extensively discussed dividend growth and dividend yield scenarios by comparing the Vanguard High Dividend Yield ETF (VYM) and the Schwab U.S. Dividend Equity ETF (SCHD).
As always with my comparisons, the goal is to educate potential investors on how the two dividend-focused ETFs work and which is right for their portfolios based on their investment goals and preferences.
So, let’s get to it.
In a hurry? I have picked the key points below:
- A dividend ETF can be a source of regular income and instant diversification for investors while saving them the stress of hand-picking individual dividend stocks.
- SCHD and VYM are both excellent options, known for their relatively lower expense ratios, impressive diversity, and excellent dividend performance over time.
- Prioritize the dividend yield, expense ratio, stock size, and historical performance when assessing both options.
- VYM can be the right choice for investors on a short-term horizon, prioritizing immediate cash flow at a higher rate.
- SCHD is ideal for investors with a long-term plan and low-risk profile, with its higher diversified dividend growth.
SCHD vs. VYM – Overview
Although I am comparing two ETFs in this discussion – the Schwab U.S. Dividend Equity ETF (SCHD) and the Vanguard High Dividend Yield ETF (VYM) – the bigger picture is a comparison between Dividend Yield ETFs and Dividend Growth ETFs. So, before anything else, let me quickly explain these two ETF types.
Unlike mutual funds, dividend exchange-traded funds hold stocks known for distributing dividends to their shareholders. Although this is not guaranteed (unlike bond’s coupon payments) and are annually taxed, Dividend ETFs can be sources of a consistent stream of income and long-term growth for your portfolio. They can be classified based on their high-yield potentials (Dividend Yield ETFs) and long-term growth potentials (Dividend Growth ETFs).
Dividend-Yielders are those exchange-traded funds with a shorter-term horizon and more preference for immediate cash flow at a higher rate. Dividend Growth ETFs or Dividend Growers are long-term in nature. The ETFs in this category hold stocks of companies whose cash flows have translated to consistent and increasing dividend payments to the holders.
Both VYM and SCHD are excellent dividend ETFs, known for their relatively lower fees, impressive diversity, and excellent dividend performance over time. But while VYM focuses on high yield, SCHD is inclined towards increasing dividend growth over time.
SCHD vs. VYM – Indexes and Methodology
The Vanguard High Dividend Yield ETF is a dividend equity ETF issued by Vanguard. It is categorized under the large-cap blend equities group and tracks the FTSE High Dividend Yield Index. Therefore, it exposes investors’ portfolios to large-cap companies within the U.S. equity market that pay dividends. Considering its focus on large-cap companies, VYM is ideal for investors with a long-term horizon, offering more stability and impressive dividends.
The FTSE High Dividend Yield Index comprises about 440 holdings, most of which are in the consumer, energy, and industrial sectors. As a result, the exposure VYM offers is rich and arguably better than what investors can get from other dividends ETFs in the space.
The Schwab U.S. Dividend Equity (SCHD) is another dividend equity ETF trading in the U.S. market. It is issued by the renowned Charles Schwab and its underlying index is the Dow Jones U.S. Dividend 100 Index. The index screens for companies with a long track record of distributions. So, you will not find small, speculative firms, especially those offering impressive distribution yields due to depressed stock prices, among its holdings.
The companies in SCHD’s books are chosen using multiple metrics, including dividend growth and yield. Therefore, investors can expect an improvement in payouts relative to ETFs that focus on the broader market.
SCHD vs. VYM – Fund Holdings and Composition
Regarding holdings, we can classify both VYM and SCHD as U.S. stocks large value funds with excellent reputations among investors. Therefore, chances are they are investing in almost the same companies.
VYM currently holds stocks from 413 companies, making it more diversified than SCHD, with just 103 holdings. When it comes to the top five sectors in each case, both ETFs focus more on Finance, Health Technology, Electronic Technology, and Consumer Non-Durables. However, while Utilities is the fifth sector in VYM, SCHD prioritizes Producer Manufacturing Companies.
Both SCHD and VYM are heavy on large-cap stocks, and they account for over 90% of the market cap in each case. Furthermore, both SCHD and VYM have all their holdings spread across North, Central, and South America. SCHD is a U.S. equity fund, so it is understandable why 99% of its stocks are in the United States. VYM, on the other hand, has 95% of its holdings in the U.S., with others spread across the U.K., Ireland, Switzerland, and others.
VYM has the upper hand when looking at the assets under management, with roughly $44 billion assets. However, SCHD is not too far behind, with $32.5 billion worth of assets. The average daily volumes are $188.18 million and $174.71 million for VYM and SCHD, respectively.
Next, let’s discuss the performance.
SCHD vs. VYM – Performance Comparison
You cannot effectively assess or compare two ETFs without checking their performance over time. The historical performance of any fund is a strong indication of its strength over time and what to expect in the years to come.
The Schwab US Dividend Equity ETF (SCHD) was launched on October 19, 2011, roughly five years after the Vanguard High Dividend Yield ETF (VYM), which launched on November 15, 2006.
Since its launch, SCHD has recorded a total return of 343.42%. This is clearly higher than VYM’s 268.28% return within the same period. In addition, the five-year total returns for both SCHD and VYM are 109.97% and 69.82%, respectively, clearly showing the former as the better performer of the two. A similar trend can be observed in the past year, where SCHD has a slightly higher return of 19.93%, compared to VYM’s 18.03%.
Overall, SCHD has performed better than VYM since the launch of the former in 2011, from both yield and risk-adjusted return perspectives.
SCHD vs. VYM – Fees and Taxes
Both SCHD and VYM are highly liquid. The expense ratio in each case is 0.06% – one of the lowest expense ratios you will find among their peers in the current market. While fees can be one of the most significant determinants when comparing two good ETFs, it will do nothing in this case to separate SCHD and VYM.
SCHD vs. VYM – ESG Ratings and Impacts
Another essential assessment metric when comparing index funds or ETFs is the ESG scores. These scores strongly indicate how the companies in any ETF’s books collectively manage the risks and opportunities associated with environmental, social, and governance matters.
The overall ESG Quality score for VYM is 8.15/10, while SCHD has 8.33/10. In essence, 51% of SCHD’s fund’s holdings have an MSCI ESG Rating of AAA or AA. (ESG Leaders), while 28% are rated ESG leaders in the case of VYM. The higher percentage in SCHD can be attributed to its fewer holdings.
Based on MSCI ESG Research LLC’s ratings, we can conclude that both funds are considerably resistant to changes due to environmental, social, and governance developments. Whichever ends up in your portfolio, you can rest assured of impressive stability even in the face of distortions and sudden changes.
How to invest in SCHD and VYM
We have mentioned how diverse dividend ETFs are and how much stability they can bring to your portfolio. But how do you invest in them?
The first step is to identify the dividend exchange-traded fund(s) you are interested in. In this case, we are talking about SCHD and VYM. Both are popular, so you will most likely find them on your broker’s website. But just before you buy, you should analyze both options and ensure they match your expectations and preferences as an investor.
Your assessment should focus on points like the dividend yield, expense ratio, stock size, and historical performance. Fortunately, these are the talking points of this article, making your assessment faster and easier. For example, the rule of thumb is to opt for those with a track record of paying dividends annually for the previous five years or higher (the higher, the better). Likewise, those with an expense ratio under 0.07% is good, but the lower, the better.
It is also important to put your money on dividend ETFs that invest in companies with large, medium, or small-cap companies. The safest of the bunch are those that focus on large-caps, while the riskiest hold only (or mostly) small-cap stocks.
With all of these boxes checked, you can go ahead to buy your desired amount of SCHD and/or VYM from your broker or directly from Schwab and Vanguard websites.
Yes, we are used to ETFs that focus on index-tracking and growth investing. But we also have those that provide income by holding only dividend-paying stocks in their portfolios. They also ensure diversification and may even continue if the paying company records a drop in earnings. Moreover, they are structured such that even if some of the stocks in the fund’s holdings reduce their dividends, the eventual overall dividend of the fund still remains relatively the same.
Investors can decide to take the dividend as returns or put it back into the fund – reinvestment. Some dividend ETFs focus on selected stocks, sectors/industries, or regions, while others cover the entire market.
Which should you choose – Dividend Growth or Dividend Yield?
If you really have to choose between SCHD and VYM, you should choose based on your investment goal. Our discussion so far has shown the Schwab US Dividend Equity ETF (SCHD) as an excellent ETF offering a balance of growth and yield. Conversely, the Vanguard High Dividend Yield ETF (VYM) focuses more on dividend yield than growth. Investors with a long-term plan and low-risk profile will find the higher diversified dividend growth of SCHD ideal for their portfolios. Likewise, VYM can be the right choice for investors on a short-term horizon, prioritizing immediate returns at a higher rate.
Finally, you can rest assured that you are not making the wrong investment decision, whichever you end up with.