Here Is Why Yield Hungry Investors Should Buy Schwab’s SCHD Over The Safe Vanguard VIG

In the 2020s, there are plenty of yield-focused exchange traded funds (ETFs) to choose from, and they’re not all created equal. Two popular dividend funds in particular — the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) and the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) — certainly have similarities. However, they also have key differences that give one fund an edge over the other.

This isn’t to suggest that either ETF is “bad.” Retirees seeking reliable passive income, for example, could benefit from owning SCHD but can also rely on VIG for consistent dividend payments. Nevertheless, when all is said and done, there’s a clear winner among the two funds that investors of all stripes should consider now.

Two Dirt-Cheap Dividend Funds

On a surface level, the Schwab U.S. Dividend Equity ETF and the Vanguard Dividend Appreciation ETF may appear to be quite similar. They both track yield-focused indexes; SCHD tracks the Dow Jones U.S. Dividend 100 Index while VIG follows the S&P U.S. Dividend Growers Index.

Furthermore, both ETFs are dirt cheap in terms of annual expense ratios (i.e., the automatically deducted fees that fund holders pay to the fund managers). Schwab’s fund has an expense ratio of 0.06%, while it’s 0.05% for the Vanguard fund, so that’s nearly a tie.

In other words, both ETFs cost-efficiently track a large assortment of well-known stocks representing dividend-paying firms. Granted, VIG focuses on dividend growers while SCHD doesn’t — but are dividend growers significantly better performers overall?

Not necessarily. Over the past five years as of March 20, the SCHD price gained 93.18%:

Meanwhile, the VIG price rose 96.83%:

The price-appreciation difference between the two isn’t huge, and we haven’t factored in the dividend yields yet — but more on that topic in a moment.

Better Volume, Broader Diversification

When we drill down to the details of the two funds, we can detect some notable differences. For one thing, as of March 20, the Schwab U.S. Dividend Equity ETF has an average daily trading volume of around 15.4 million shares. This easily beats the Vanguard Dividend Appreciation ETF’s average daily trading volume of roughly 1.2 million shares. This is significant because a higher trading volume may allow for easier and more cost-effective purchases and sales of a fund.

Next, we can compare the diversification of the two funds. Which one has a more balanced mix across various market sectors? This should be a major consideration for safety-minded investors.

Surprisingly, Vanguard’s fund allocates 24.1% of its holdings toward information technology stocks and 22.7% toward financial stocks. That’s nearly half of the portfolio’s weighting in just two market sectors!

In contrast, the Schwab fund’s heaviest portfolio weightings are as follows:

• Financials: 18.73%
• Health care: 16.67%
• Consumer staples: 14.37%
• Industrials: 13.28%

These are more moderate and balances sector allocations. As for the information technology segment, Schwab’s fund dedicates a reasonable 8.74% toward that market sector.

Breaking it down to component stocks, it’s worth noting that out of the Vanguard Dividend Appreciation ETF’s four top holdings in terms of portfolio weighting, three of them are Apple (NASDAQ:AAPL) at 4.85%, Broadcom (NASDAQ:AVGO) at 4.8%, and Microsoft (NASDAQ:MSFT) at 3.4%. That’s 13.05% of the entire portfolio in only three stocks, all in the technology sector.

Turning to the Schwab U.S. Dividend Equity ETF, some of its top holdings by weighting include Abbvie (NYSE:ABBV) at 4.96%, Coca-Cola (NYSE:KO) at 4.59%, Pfizer (NYSE:PFE) at 4.28%, and Chevron (NYSE:CVX) at 4.27%. That’s a decently diversified mix, I’d say, of famous firms that pay reliable dividends.

Hungry for Yield? Here’s the Better Pick

Speaking of reliable dividends, if SCHD and VIG delivered similar share-price appreciation over the past five years, then the dividend yield differential could determine the ultimate winner. After all, you came here seeking yield, right?

So, let’s get right down to the nitty gritty. Checking in on March 20, the Vanguard Dividend Appreciation ETF offers a forward annual dividend yield of 1.66%. Impressively, the Schwab U.S. Dividend Equity ETF more than doubles the Vanguard fund’s yield, offering a juicy 3.76%.

How can the yield difference be so wide? It’s because the VIG ETF’s focus isn’t on high yield as much as dividend growers. Just because a company has grown its dividend payouts over time, doesn’t necessarily mean the yield percentages are relatively high.

Hence, when it comes to greater trading volume, more balanced diversification, and higher yield, it’s really no contest. Sure, the Vanguard Dividend Appreciation ETF might appeal to investors who are hyper-focused on dividend growers. However, for reasonably safe portfolio exposure to well-known names that serve up substantial dividend distributions, your best bet is the Schwab U.S. Dividend Equity ETF.

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