VIG - 2 Reasons Why SCHD Is A Better ETF Pick Than VIG

2023-10-24 05:33:52 ET

Summary

• Schwab U.S. Dividend Equity ETF and Vanguard Dividend Appreciation Index Fund ETF Shares are attractive choices for passive income investors seeking diversified portfolios of high-quality dividend-paying stocks.
• Vanguard Dividend Appreciation Index Fund ETF Shares offers low expense fees and a focus on companies with a history of dividend growth.
• Schwab U.S. Dividend Equity ETF has a higher yield and stronger long-term returns, making it a superior value proposition.

Both the Schwab U.S. Dividend Equity ETF (SCHD) and the Vanguard Dividend Appreciation Index Fund ETF Shares ( VIG ) are attractive choices for passive income investors who want to invest in a diversified portfolio of high-quality dividend-paying stocks.

The Vanguard Dividend Appreciation ETF offers investors a widely diversified stock portfolio with a low expense fee. However, I think that the Schwab U.S. Dividend Equity ETF makes a superior value proposition given its higher yield and stronger long-term returns on net asset value.

Investment Profile And Portfolio Diversification

Both exchange-traded funds are highly diversified, which should allow passive income investors to sleep well at night. The Vanguard Dividend Appreciation ETF has a heavy focus on companies that have historically grown their dividends. The fund invests primarily in the information technology sector, which accounted for almost a quarter of total investments (22.6%) as of the end of August 2023.

The second-largest sector is financials, which represented about 18% of fund investments. The ETF’s top holding was Microsoft (MSFT), which represented almost 5% of the fund’s total investment assets as of the end of August. Other core holdings include Apple Inc. ( AAPL ) , Exxon Mobil Corp. ( XOM ), and Visa Inc. ( V ) .

In the case of the Schwab U.S. Dividend Equity ETF, industrials are most heavily represented in the ETF’s portfolio (18.1%). The percentage allocation for the second-largest sector, Health Care, was 15.60%.

As opposed to the Schwab U.S. Dividend Equity ETF, this ETF primarily invests in high-yielding investment securities and focuses less on dividend appreciation potential. The ETF’s largest investment is Amgen Inc. ( AMGN ) with a percentage allocation of 4.5%. I covered Charles Schwab’s high-yield ETF in more detail in my article Schwab U.S. Dividend Equity ETF: A 3.4% Yielding ETF And A Bet On America .

Assets Under Management Comparison

The Vanguard Dividend Appreciation ETF has a size advantage over its smaller cousin, the Schwab U.S. Dividend Equity ETF.

As of 17 October 2023, the Vanguard Dividend Appreciation ETF had $67.4 billion of assets under management, which compares against total AUM of $47.4 billion in the case of the Schwab U.S. Dividend Equity ETF.

Performance Comparison

The 1-year return for the SCHD was 6.75% (on an NAV basis) compared to 12.56% for the VIG.

While the VIG beats the SCHD in the short term, the SCHD beats it on a long-term basis.

The Schwab U.S. Dividend Equity ETF reported a 10-year annual NAV return of 11.91% compared to a 12.01% return for the underlying benchmark index, the Dow Jones U.S. Dividend 100 Index.

On the other hand, the Vanguard Dividend Appreciation ETF had a 10-year NAV return of 11.45%. The benchmark index for the Vanguard Dividend Appreciation ETF is the Spliced S&P U.S. Dividend Growers Index TR.

In the last decade, the Schwab U.S. Dividend Equity ETF has outperformed the Vanguard Dividend Appreciation ETF by a not-insignificant margin. For passive income investors, the chart below is crucial: high-yield has beaten dividend growth in the last ten years, at least in a direct performance comparison between SCHD and VIG.

Yield Comparison

Besides a superior long-term NAV performance, the decision whether to buy the Vanguard Dividend Appreciation ETF or the Schwab U.S. Dividend Equity ETF ultimately comes down to your yield. The Vanguard Dividend Appreciation ETF investment option offers passive income investors a 2.06% yield compared to a 3.78% yield for the Schwab U.S. Dividend Equity ETF.

Comparable Expense Ratios

The Vanguard Dividend Appreciation ETF charges passive income investors 0.06% for the privilege of managing their assets, and the Schwab U.S. Dividend Equity ETF has exactly the same expense ratio.

I think one of the most underrated ways for passive income investors to boost their long-term total return potential is to pay more attention to the fees that investment funds charge. As I explained in this article , investment fees compound over time and could cost passive income investors tens of thousands of dollars over their investment spans (if not more).

Two Reasons Why SCHD Is A Better Passive Income Bet Than VIG

Passive income investors have basically two questions to answer:

1. Do you value having a higher amount of cash today over the potential of achieving faster dividend growth in the future?; and
2. How long do you plan to invest, when is your planned entry into retirement?

While the VIG draws in passive income investors through the promise of investing into companies that have strong potential to grow their dividends, locking in a high yield from the get-go means that passive income investors can immediately invest a higher dollar amount into other stocks or reinvest their dividends into the SCHD today.

Thus, I think the SCHD has a serious reinvestment advantage over the VIG because more cash today is always better, in my view, than the potential of a growing dividend payout tomorrow. The more you invest today, the stronger the compounding effect, too.

Secondly, with inflation being a pain again and inflation soaring 3.7% in September, investors might see the VIG’s 2% yield as an inadequate solution to protect their income and wealth.

What passive income investor is looking to invest in a portfolio of dividend-paying stocks when the portfolio yield (in the case of VIG about 2.0%) is about half the present inflation rate? In a high-inflation environment, that ETF that offers higher yield is the better choice for passive income investors. Period.

If inflation gets worse, which is entirely possible, the attractiveness of the SCHD, in my view, would only increase.

Both ETFs Trade A Small Premiums To NAV

Exchange-traded funds typically trade around NAV, so in both cases, the market prices for the VIG as well as the SCHD are close to NAV. VIG is presently selling for a 0.01% premium to NAV, whereas SCHD sells for a 0.00% premium to NAV.

What About The Downside?

Both exchange-traded funds offer passive income investors a U.S.-centric investment portfolio that is made up of high-quality stocks that produce recurring income.

With that being said, the appearance of a recession could impact how both ETFs perform moving forward. If a recession is avoided, however, both funds could perform well, as both of them include pro-cyclical stocks which tend to do well during boom periods.

My Conclusion

Passive income investors are spoiled for choice when it comes to investing in passive income options. Both the Vanguard Dividend Appreciation ETF and the Schwab U.S. Dividend Equity ETF are popular choices for passive income investors who want to invest in a diversified portfolio of high-quality U.S. dividend stocks.

While the Vanguard Dividend Appreciation ETF has a better 1-year return, I would nonetheless choose the Schwab U.S. Dividend Equity ETF due to its superior long-term performance, but also because more cash today (SCHD has a higher yield) is more valuable than the promise of growth in the future). Furthermore, SCHD makes a strong value proposition for passive income investors who are concerned about inflation and how it will affect their wealth/retirement.

Though investors in VIG may have the potential to grow their dividends in the long term due to the ETF’s focus on dividend growers, I think the Schwab U.S. Dividend Equity ETF’s substantially higher dividend yield makes SCHD a clear winner in a direct comparison.

For further details see: