SCHD vs VIG: Which Dividend ETF is Best for Your Investment Goals?

As interest rates navigate a period of potential easing, the landscape for income-seeking investors is shifting. While fixed income investments might become less appealing, dividend-paying stocks and Exchange Traded Funds (ETFs) are gaining traction as attractive alternatives for generating income. Dividend ETFs offer a convenient route to invest in a diversified portfolio of top dividend stocks, simplifying the process compared to selecting individual stocks.

When evaluating dividend ETFs, key factors such as dividend yield, dividend growth, and the overall quality of the dividend payouts are crucial. Among the popular passive dividend ETFs designed for income-focused investors, the Vanguard Dividend Appreciation ETF (VIG) and the Schwab U.S. Dividend Equity ETF (SCHD) stand out. Both VIG and SCHD provide exposure to high-caliber, dividend-distributing companies and offer compelling advantages, yet they cater to slightly different investment philosophies. SCHD’s underlying index prioritizes companies with robust dividend yields, whereas VIG’s index tracks companies with a proven history of consistent dividend growth, notably excluding the highest 25% yielders within its eligibility pool. Let’s delve into a detailed comparison of VIG and SCHD to help you determine which ETF aligns best with your dividend investment strategy.

VIG ETF: A Deep Dive for Dividend Growth Investors

Overview: The Vanguard Dividend Appreciation ETF (VIG), managed by Vanguard Group, is engineered to mirror the performance of the S&P U.S. Dividend Growers Index. This index is composed of U.S. based companies that have consistently increased their annual dividend payouts for a minimum of 10 consecutive years. Interestingly, to maintain a focus on sustainable dividend growth, the index methodology excludes the top 25% of companies with the highest dividend yields from its eligible universe. VIG employs a full replication strategy to precisely track its benchmark index and held 338 stocks as of September 30, mirroring its index composition.

Sector Allocation: VIG’s portfolio is weighted towards key sectors of the economy, with the top three being:

Technology (24%)
Financials (20%)
Healthcare (15.5%)

Top Holdings: VIG’s top ten holdings constitute approximately 30% of its total assets, showcasing a blend of established market leaders and dividend growth stalwarts. These include:

Apple (APPL)
Broadcom (AVGO)
Microsoft (MSFT)
JPMorgan Chase (JPM)
UnitedHealth (UNH)
ExxonMobil (XOM)
Visa (V)
Mastercard (MA)
Procter & Gamble (PG)
Home Depot (HD)

VIG’s significant allocation to the technology sector has been a key driver in its strong historical price appreciation, capitalizing on the growth of technology companies in recent years.

Performance Metrics: VIG falls under Morningstar’s Large Blend category, indicating its investment style is broadly representative of the overall U.S. stock market regarding company size, growth characteristics, and valuation. While VIG’s performance has slightly trailed behind the S&P 500, it has still delivered robust returns over the past several years, demonstrating its strength as a dividend growth investment.

Historical performance chart of VIG ETF showcasing growth over time.

Expense Ratio: VIG boasts an exceptionally low expense ratio of 0.06%. This translates to investors paying a mere $6 annually for every $10,000 invested in the ETF. Compared to the average expense ratio of 0.78% for similar funds, VIG presents a highly cost-effective option. Expense ratios are a critical consideration for long-term investors, as higher fees can significantly erode investment returns over time.

SCHD ETF: Emphasizing High Dividend Yield and Quality

Overview: The Schwab U.S. Dividend Equity ETF (SCHD), offered by Charles Schwab, is designed to closely track the total return of the Dow Jones U.S. Dividend 100 Index, before accounting for fees and expenses. This index targets 100 U.S. companies known for paying high dividends consistently while also demonstrating financial health.

The Dow Jones U.S. Dividend 100 Index incorporates stocks from 100 high dividend-yielding U.S. companies that have a history of consistent dividend payments. To ensure diversification and prevent over-concentration, the index mandates that no single stock can exceed 4% of the index weight, and no single sector can represent more than 25%.

The index employs a daily monitoring mechanism to ensure adherence to these weight constraints. If the cumulative weight of stocks exceeding 4.7% surpasses 22%, a reweighting of the index is triggered. Adjustments resulting from this check are implemented two business days after the threshold breach.

Stock selection for the index involves a rigorous screening process. Real Estate Investment Trusts (REITs) are excluded, and eligible stocks must have a minimum of 10 years of consecutive dividend payments, a float-adjusted market capitalization of at least $500 million, and a minimum three-month average daily trading volume (ADTV) of $2 million.

Stocks that pass these initial screens are then ranked based on their indicated annual dividend (IAD) yield, which is an estimation of dividends anticipated over the next 12 months, typically annualized from the most recent quarterly payout. Only the top half of securities based on this yield ranking are considered for inclusion.

The eligible stocks undergo further ranking based on four key financial metrics: free cash flow to total debt, return on equity, IAD yield, and five-year dividend growth rate. These four rankings are combined into a composite score, and the top 100 stocks with the highest composite scores are selected for the index. This comprehensive selection methodology ensures that the Dow Jones U.S. Dividend 100 Index is composed of premier dividend-paying stocks, emphasizing both the quality and sustainability of their dividends.

Portfolio Composition: Reflecting its stringent selection criteria, SCHD’s portfolio is heavily weighted towards large-cap companies. Approximately 62.6% of its holdings are in stocks with a market capitalization of $70 billion or more, and about 90% are in companies with market caps exceeding $15 billion.

Sector Allocation: SCHD’s sector allocation emphasizes different segments compared to VIG, with the top three sectors being:

Financials (19%)
Healthcare (15.9%)
Consumer Staples (13.4%)

Top Holdings: SCHD’s top ten holdings account for a more significant portion of its portfolio compared to VIG, representing about 40.9% of total assets. This indicates a slightly more concentrated portfolio at the top. Key holdings include:

Cisco (CSCO)
BlackRock (BLK)
Chevron (CVX)
Home Depot (HD)
Bristol-Myers Squibb (BMY)
Texas Instruments (TXN)
AbbVie (ABBV)
Verizon (VZ)
Amgen (AMGN)
United Parcel Service (UPS)

Dividend Yield: SCHD has a consistent track record of dividend payments for over a decade, with a history of increasing annual payouts. Notably, SCHD’s trailing twelve months (ttm) distribution yield of 3.4% is double that of VIG’s, which stands at 1.7%. This significant yield difference is a key differentiator for income-seeking investors.

Performance Metrics: While SCHD may not consistently outperform the S&P 500, it has still generated solid returns for its investors, affirming its effectiveness as a dividend-focused ETF.

Performance history of SCHD ETF demonstrating consistent returns.

Expense Ratio: Similar to VIG, SCHD also features a very competitive expense ratio of 0.06%, making it equally cost-effective for investors.

Recent Stock Split: In an unusual move for an ETF, SCHD underwent a 3-for-1 stock split effective October 10. This split reduced the price per share, making it more accessible for smaller investors to initiate positions. However, the underlying value for shareholders and the fund’s fundamental characteristics remained unchanged.

VIG vs. SCHD: Side-by-Side Comparison

To provide a clearer picture, let’s compare VIG and SCHD across key metrics:

Feature	VIG	SCHD
Expense Ratio	0.06%	0.06%
Dividend Yield (TTM)	1.7%	3.4%
Dividend Growth (5-yr CAGR)	10.11%	12%
Holdings	~338	~100
Top 10 Holdings	~30% of Assets	~40.9% of Assets
Top Sector	Technology (24%)	Financials (19%)
Index Focus	Dividend Growth	High Dividend Yield & Quality

Sources: Yahoo Finance, Google Finance, Seeking Alpha.

VIG vs. SCHD: Areas of Similarity

Despite their differences, VIG and SCHD share several common characteristics that make them both attractive options within the dividend ETF universe.

Passive Index ETFs

Both VIG and SCHD operate as passively managed index ETFs. This means they aim to replicate the performance of their respective underlying indexes rather than relying on active stock selection by fund managers. This passive approach typically results in lower expense ratios and more predictable investment strategies. They are popular choices for dividend investors and retirees seeking consistent, supplemental income.

Focus on High-Quality Dividend Stocks

A core similarity is their shared emphasis on investing in high-quality dividend-paying stocks. Both ETFs are designed to hold companies with a demonstrated commitment to returning value to shareholders through dividends. Furthermore, both VIG and SCHD distribute dividends to investors on a quarterly basis, providing regular income streams.

Low Expense Ratio

As highlighted earlier, both VIG and SCHD are exceptionally cost-efficient, featuring identical low expense ratios of 0.06%. This shared attribute is a significant advantage, as it minimizes the costs associated with fund ownership, potentially enhancing long-term returns. For every $10,000 invested, investors pay a mere $6 in annual fees for either ETF.

Overlap in Sector Exposure

While their top sector allocations differ, both VIG and SCHD have significant exposure to the financial and healthcare sectors within their top three weightings. Both ETFs allocate approximately 20% to financials and around 15% to healthcare, indicating some overlap in their sector preferences and exposure to economically resilient sectors.

Diversification Benefits

Both VIG and SCHD offer substantial diversification by holding a broad range of stocks. VIG holds approximately 338 stocks, while SCHD holds around 100. This level of diversification helps to mitigate concentration risk, ensuring that the ETFs’ performance is not overly dependent on the performance of a few individual stocks.

Qualified Dividends

Dividends from both VIG and SCHD are generally classified as qualified dividends. This is a tax advantage for investors in taxable accounts, as qualified dividends are taxed at lower capital gains tax rates rather than at higher ordinary income tax rates, provided that holding period requirements are met.

Valuation Alignment

The market prices of both VIG and SCHD closely track their respective net asset value (NAV) per share. This alignment indicates efficient market pricing and transparency, ensuring that investors are generally paying a fair price for the underlying assets of each ETF.

VIG vs. SCHD: Key Differentiating Factors

Despite their similarities, crucial differences between VIG and SCHD dictate which ETF might be more suitable depending on specific investment objectives.

Dividend Yield Disparity

The most prominent difference lies in their dividend yields. SCHD consistently offers a dividend yield that is approximately twice as high as VIG’s. This yield differential is primarily due to VIG’s index methodology, which intentionally excludes the highest-yielding 25% of eligible companies that meet its 10-year dividend increase criteria. This exclusion is a deliberate strategy to focus on dividend growth sustainability over maximizing current yield.

Capital Appreciation vs. Income Focus

In terms of price performance and capital appreciation, VIG has historically outperformed SCHD over various periods, including year-to-date, 1-year, 3-year, and 5-year intervals. This outperformance is likely attributable to VIG’s greater allocation to the technology sector, which has experienced significant growth in recent years. VIG allocates around 24% to technology, compared to SCHD’s approximately 10.9% exposure. This difference highlights VIG’s tilt towards growth-oriented sectors, while SCHD adopts a more value-oriented approach with a focus on higher current income.

VIG: Pros and Cons for Investors

Pros of VIG

Blend of Growth and Income: VIG effectively balances income generation with capital appreciation potential. Its focus on companies with strong financials and a history of increasing dividends positions it well for both steady income and long-term growth.
Low Expense Ratio: The ultra-low expense ratio of 0.06% is a significant advantage, especially for long-term investors. These minimized costs compound over time, leading to potentially higher net returns compared to more expensive alternatives.

Cons of VIG

Lower Dividend Yield: Compared to SCHD and other high-dividend ETFs, VIG’s lower dividend yield might be less appealing to investors prioritizing immediate or near-term income, particularly retirees who heavily rely on dividend income to meet living expenses.

SCHD: Pros and Cons for Investors

Pros of SCHD

Higher Dividend Yield: SCHD offers a comparatively higher dividend yield than VIG, thanks to its rigorous stock selection process that emphasizes high-yielding, quality dividend stocks. This higher income stream can be particularly beneficial in environments with lower interest rates, where yield is harder to come by.
Diversified Portfolio of Quality Dividend Stocks: SCHD provides a diversified exposure to a curated selection of top-rated dividend stocks, combined with an exceptionally low expense ratio. This combination is highly attractive for investors seeking both income and value.
Strong Long-Term Returns: SCHD has demonstrated a strong track record of double-digit annualized returns over the long term. While past performance is not indicative of future results, this history is reassuring for long-term investors.
Consistent Dividend Growth: SCHD has not only provided high yields but also exhibited impressive dividend growth. It has increased its dividends for 12 consecutive years, with a notable 5-year dividend growth rate of 12%, outpacing VIG in dividend growth metrics.

Cons of SCHD

Exclusion of REITs: SCHD’s exclusion of Real Estate Investment Trusts (REITs) limits its potential for even higher income. REITs are known for their substantial dividend payouts, as they are required to distribute at least 90% of their taxable income to shareholders. However, it is important to note that REIT dividends are often taxed as non-qualified dividends at ordinary income tax rates, which are typically higher than the rates for qualified dividends offered by SCHD and VIG.
Yield Compared to High-Yield Savings Accounts: While SCHD’s 3.4% dividend yield is attractive in the ETF space, it is still less competitive compared to the 5%-plus Annual Percentage Yields (APYs) offered by some High Yield Savings Accounts (HYSAs). For investors solely focused on maximizing current income without market risk, HYSAs may present a compelling alternative, especially considering FDIC insurance up to $250,000 per depositor.

VIG vs. SCHD: Investor Suitability – Which ETF to Choose?

VIG Suitability: VIG is ideally suited for investors who prioritize long-term capital appreciation alongside steadily growing dividends. It is a strong choice for those in the accumulation phase of their investment journey, where growth and increasing income over time are key objectives. However, for retired investors who heavily depend on dividend income for living expenses, VIG’s lower yield of 1.7% may be less attractive. The index methodology, which intentionally excludes the top 25% highest-yielding companies, reflects a focus on sustainable dividend growth over maximizing immediate yield.

This approach is designed to mitigate “yield traps,” where excessively high yields might signal underlying financial distress and potential dividend cuts. By focusing on companies with a proven track record of dividend growth, VIG aims for reliability and sustainability in dividend payouts.

SCHD Suitability: SCHD is particularly appealing to income-focused investors and retirees who seek strong current yields. It is also suitable for long-term investors who appreciate a blend of income and capital appreciation. SCHD’s emphasis on high-yield, quality dividend payers positions it favorably in potentially lower interest rate environments, where higher yields become increasingly valuable.

Bottom Line: Making the Right Choice for Your Portfolio

Both VIG and SCHD are excellent ETFs that offer diversified, low-cost exposure to large-cap stocks with a history of consistent dividend payments and growth. The choice between VIG and SCHD ultimately hinges on your individual financial goals and investment priorities.

For investors seeking a higher current income and prioritizing yield, SCHD appears to be the more compelling option. Not only does it offer a significantly higher yield than VIG, but it also maintains a solid track record of price performance and impressive dividend growth.

While VIG is often recognized as the quintessential dividend growth ETF, SCHD has demonstrated a robust dividend growth history of its own, with 12 years of consecutive increases and a 5-year growth rate of 12%, surpassing VIG’s 10 consecutive years and 10.11% growth rate.

Furthermore, SCHD’s index employs a rigorous stock selection process that emphasizes fundamental strength and prioritizes the quality and sustainability of dividends. These factors, combined with the potential shift towards a lower interest rate environment, suggest that SCHD is well-positioned to appeal to investors seeking a combination of strong yields, dividend growth, and capital appreciation.

Disclaimer: Please note that I am not a registered investment advisor, and this article is for informational purposes only. Investors should conduct their own thorough due diligence before investing in any stock or ETF. I am not responsible for any investment decisions made after reading this article. Readers are advised not to rely solely on the opinions and analysis presented here and are encouraged to perform independent research before making any investment.

Frequently Asked Questions (FAQs)

What is the primary distinction between VIG and SCHD?

The main difference lies in their index methodologies. SCHD tracks an index that prioritizes stocks with higher dividend yields, while VIG follows an index focused on companies with a history of consistent dividend growth, excluding the top 25% highest-yielding eligible firms to emphasize sustainability.

Which ETF, VIG or SCHD, offers a higher dividend yield?

SCHD provides a significantly higher dividend yield. SCHD’s trailing 12-month distribution yield is 3.4%, which is double VIG’s yield of 1.7%.

Are VIG and SCHD suitable for long-term investment strategies?

Both VIG and SCHD are well-suited for long-term investing, offering exposure to quality dividend-paying companies. However, SCHD is often favored for its blend of solid price performance, higher yields, and impressive dividend growth metrics, potentially making it a more attractive option for long-term income and growth.

Is there a tax advantage to choosing VIG over SCHD for investment?

Both VIG and SCHD primarily distribute qualified dividends, which are taxed at lower capital gains rates, assuming holding period requirements are met. VIG’s lower dividend yield might result in slightly less taxable income compared to SCHD if held in a taxable account, but this difference is directly tied to the yield disparity rather than a specific tax advantage in fund structure.

Between VIG and SCHD, which ETF exhibits less volatility?

VIG tends to be slightly less volatile than SCHD. VIG has an annualized volatility of around 9.94%, while SCHD’s is approximately 11.2%. However, both ETFs exhibit volatility scores below the median for all ETFs, indicating they are generally less volatile than the broader ETF market.