Today we’re going to compare SCHD and VYM – the Schwab US Dividend Equity ETF (NYSEARCA:SCHD) and the Vanguard High Dividend Yield ETF (NYSEARCA:VYM) – and we’ll answer the question: which one of the two is the best dividend ETF?
Both these ETFs provide diversification and good yields and come from reputable companies. In order to make a good decision, I will analyze and grade 9 different aspects of these 2 ETFs: ETF Strategy, Passivity, Expense Ratio, Diversification, Sector Exposure, Risk, Volatility, Performance and Dividend Yield.
VYM, the Vanguard ETF, tracks the FTSE High Dividend Yield Index, which focuses on stocks of U.S. companies that have paid above-average dividends and are expected to pay high dividends in the future, excluding REITs.
So, as you can see, strong focus on high dividend yield as a selection process.
The weight of each company in the portfolio of VYM is determined by its market cap; So the higher the market capitalization of a company, the higher the percentage of the stock will be in the ETF.
SCHD, on the other hand, tracks the Dow Jones U.S. Dividend 100 Index, and the goal of the ETF is to find quality, sustainable dividend-yielding companies. So there is not only a research of high dividend yielding companies but also a higher focus on the value of the companies.
Companies are choses if they have:
- 10 consecutive years of dividend payment
- A high market capitalization
- High dividend growth over the past five years
- High free cash flow to total debt
- High return on equity
- High expected forward yield
A lot of important factors are used to find and select value companies that are able to deliver stable and high dividends in the long term.
So I find the ETF strategy of SCHD to be much more sophisticated than VYM and for this reason I’m going to give 6 points to VYM and 9 points to SCHD.
One of the important aspects that make some ETFs so successful compared to stock picking or to actively managed funds is the fact that you don’t have to actively select, buy and sell the stocks included in the ETF. And this is valid both for you and for whatever Asset Management Company owns the ETF.
So I place a lot of value in the passivity of an ETF because, whenever humans make decisions, there is an emotional factor that “usually” plays against the results.
So let’s how passive these two dividend ETFs are.
VYM tracks the FTSE High Dividen d Yield Index using a so-called full replication technique. This means that the ETF is entirely passive and management has no possibility to act – even if they were to find a mispricing or investment opportunity.
SCHD instead tracks its index in a different way.
Its goal is to follow the index as closely as possible, but not with 100% replication like in the case of VYM.
In fact, according to the prospectus, with SCHD the management will replicate the index with up to 90% of the assets, while investing the remaining 10% actively.
I know this is a subjective thing and some of you might consider this 10% actively managed an advantage of SCHD. But since I’m evaluating passivity here as a positive factor, I’m going to give 10 to VYM, because it’s 100% passive, and 9 to SCHD, because it’s 90% passive. So SCHD is still leading with 18 points against 16 of VYM.
VYM has an extremely low expense ratio of 0.06 and this is because of the total passivity of the management style. That means that it will cost you $6 per year for every $10,000 you own.
The interesting thing is that SCHD, which as we’ve seen is only 90% passive and can manage up to 10% actively, offers the same expense ratio of 0.06%.
Considering this, I’m going to give 8 points to both VYM and SCHD because they both have a great expense ratio, and SCHD leads now with 26 points against 24 of VYM.
VYM contains 466 different companies, while SCHD has 104 holdings, giving it more concentration on top companies than VYM.
You can see here that the main holdings of SCHD are PepsiCo, Merck & Co, Coca-Cola, Broadcom and Home Depot. The highest weight is 4.64% and the total weight of the top 10 companies is 41.99%. In comparison, VOO, which counts companies like Exxon Mobil, Johnson & Johnson, JPMorgan and Procter & Gamble, is more diversified and the total weight of the top 10 companies is 24.98%.
The concentration of SCHD on just 104 companies can be a good thing for people looking for value-based ETFs. This is because you do not have to worry about those other smaller companies included in more diversified ETFs like VYM. On the other hand, a higher diversification protects you in case some of the companies have really bad returns.
In terms of Assets Under Management, VYM manages $62B and it does this with more diversification through more than 4 times the number of holdings of SCHD. SCHD on the other hand has $45B in Assets under Management.
Considering the higher diversification of VYM, the lower concentration on the top 10 holdings and also the higher Assets under Management, I’m going to give here 9 to VYM and 6 to SCHD. So, now VYM is leading with 33 points against 32 for SCHD.
I put together a table here that shows you the sector breakdown for VYM and SCHD.
As for SCHD, you can see that the exposure to the financial sector has dropped substantially and lies around 13.92%, partly because its financial stocks dropped because of the financial crisis, and partly because some of them have been dropped out of the ETF during the last reconstitution in march 2023.
VYM has more exposure to energy than SCHD, as well as utilities, which for VYM takes 7.62% while for SCHD only 0.28%. Both of those sectors are quite asset-intensive, meaning they require a lot of capital in order to operate. This should bring VYM to have a slightly better performance than SCHD in an inflationary environment like the one we’ve had in the past 2 years.
Generally speaking, the sector exposure of SCHD is preferable, with a more balanced weighing of the top sectors and also less exposure to the financial sector.
For this reason, I’m giving 6 points to VYM and 7 points to SCHD, which bring the two ETFs to the same level with 39 points.
Let’s now discuss the risk of the ETFs through the so-called Sharpe Ratio.
The Sharpe Ratio is a measure of the risk of an investment, adjusted by its volatilty, and this is done by comparing the return of an investment to that of a risk-free asset.
So why would you use something like this?
Imagine that you are comparing investing in a stock with investing in Bitcoin. Bitcoin could give you a much higher return than a stock, but brings also a higher risk and volatility. So in order to compare two investments weighing not only the potential return but also the potential risk, you use Risk-Adjusted Ratios like the Sharpe Ratio.
Basically, the greater a portfolio’s Sharpe ratio, the better its risk-adjusted performance.
If you check the Sharpe Ratio of SCHD and VYM during the last 10 years, you notice that in general SCHD, the blue line, has had a higher Sharpe Ratio overall. This means that, in general, explained in a really basic way it’s more worth it investing in SCHD than in VYM with regards to Returns and Risk.
But you can already see that in the last 1 or 2 years, which were really volatile years, VYM had a higher ratio. To see it better, let’s see the ratio for both dividend ETFs Year To Date.
Considering that in general SCHD has shown a higher Performance to Risk Ratio than VYM, I’m going to give here 6 points to VYM and 7 points to SCHD, that results in 45 total points for VYM and 46 for SCHD.
Let’s dig a little bit deeper into volatility. The more volatile an investment is, the easier we are going to make emotional mistakes.
We’re going to use PortfoliosLab again to compare the volatility of the two ETFs and in particular we’re going to use a graph that shows us the rolling one-month volatility:
Most of the time VYM and SCHD showed a similar volatility in the last 10 years, but if we dig deeper and we see for example the last 5 years, or even year to date, VYM showed a lower volatility than SCHD, meaning that SCHD’s price experienced larger fluctuations and is considered to be riskier than VYM based on this measure. Nevertheless in the last 10 years the two ETFs were similar, so I’m going to give 8 points to VYM and 7 points to SCHD, bringing both ETFs to a total value of 53 points.
Despite dividends being the main feature of both ETFs, capital appreciation is always much welcomed. In fact, when I evaluate an ETF I don’t just look at the dividend yield or the return, but I look at the total return, which is the return given by capital appreciation plus dividend reinvested.
And I do this because I think that as long as you are not retired you should pump as much money as possible into investments in order to profit more from the compounding effect of the return.
So using SeekingAlpha.com, which is one of my favorite websites for investing analysis, I compared the performance of VYM and SCHD in the last 10 years. I couldn’t really compare for longer than that because SCHD was created at the end of 2011.
In terms of total return, over a long 10-year period, SCHD had significantly outperformed VYM, returning 183.80% against 144.85% of VYM.
The result doesn’t change when comparing the last 5 years, where SCHD returned an amazing 68.71% compared to 43.59% of VYM.
Only if we compare the last 12 months we see that VYM has shown more stability thanks to its diversification by gaining 1.59% against a loss of 3.08% of SCHD:
One of the reasons why in the last couple of years the performance of VYM has improved is that as I mentioned before VYM has more exposure into asset “heavy” businesses like energy and utilities. So, in theory, it should do better in high inflationary environment, just like the one from the last two years.
However, despite the elevated inflation, VYM was not really able to outperform in the last 3 years as you can see here, but barely match the returns of SCHD:
Now that inflation appears to be cooling off this supposed advantage of VYM will likely fade away and SCHD will most likely increase their return against VYM in the future.
For this reason, since SCHD has such a great performance that it’s basically like the S&P500, I’m going to give 10 points to SCHD and 8 points to VYM, bringing SCHD to pole position with 63 points against 61 of VYM.
Both SCHD and VYM have above average dividend yields for their investors so the truth is, you can’t do anything wrong with any of them.
The two ETFs are identical in terms of frequency of dividend payments – in both cases you’re going to get quarterly distributions (4 payments per year).
In terms of TTM yield (Trailing Twelve Months), SCHD is definitely the winner with 3.74%, compared to 3.19% for VYM. If we look at the average of the last 4 years, VYM improves a lot and gets extremely close to SCHD. When it comes to the consistency of the dividend growth, while VYM has a slightly longer track record of consecutive distribution increases with 12 years against 10 of SCHD, the 3 and 5-year dividend growth of SCHD is way superior than the rate for VYM. So when it comes purely to the dividend profile, SCHD is a superior ETF.
To give you an idea of what is the real difference between receiving 3.74% dividends like with SCHD or 3.19% like VYM, if you wanted to earn $1,000 per month in pure dividends owning only SCHD or VYM, you would need a portfolio of $320,856 of SCHD, or $376,176 of VYM. so with VYM you’d need 17% more portfolio value to receive the same Dividends.
For this reason, I think that it’s clear that SCHD wins the Dividend race and I’m going to give 9 points to SCHD and 7 points to VYM, making SCHD our winner with 72 points.