So far this year, one ETF has stood out to me on Twitter as the one dividend investors seem most keen on: the Schwab US Dividend Equity ETF (NYSEARCA:SCHD). I classify dividend investors as holding a set of beliefs irreconcilably different from those of Bogleheads, who are more likely to consider dividends to be an irrelevant factor. Bogleheads, named after Vanguard founder Jack Bogle, generally believe that investors should instead simply buy all stocks in proportion to their market weight, whether they pay a dividend or not, and to do so paying as little as possible in fees, which is pretty much what most Vanguard funds do. To contrast the thought and practice of dividend investors versus Bogleheads, I decided to write this article comparing SCHD with what is still Vanguard's largest fund, the Vanguard S&P 500 ETF (NYSEARCA:VOO). I will start by comparing the relative growth in the asset size (a measure of popularity) of the two funds, then compare how the two portfolios are constructed, then I will finish by outlining scenarios in which one ETF might outperform the other.
As background for the VOO side of this article, I suggest reading my articles from February this year on how Vanguard ETFs fit together to make a low-cost global portfolio, and on .
SCHD's Rapid Growth In Assets
By assets under management (AUM), VOO has, since the beginning, been significantly larger than SCHD, and VOO could easily remain many times larger than SCHD for decades to come. What it is notable is how much SCHD caught up in 2021 and 2021, when it went from less than 8% of VOO's size to over 17% before falling back to around 14.7% today. There are many explanations for this, but my main explanation is that investors flocked to dividend stocks as an inflation-resilient source of income in the wake of the COVID-19 stimulus. I reckon the faster growth in VOO's assets so far in 2023 is more due to the more rapid rise in the valuation multiples of top VOO components like Amazon than to any decline in attractiveness of the dividend stocks in SCHD. This next chart below shows this ratio of SCHD's AUM to VOO's AUM over the past 10 years.
SCHD is currently the 16th largest US equity ETF, and the 3rd largest with a focus on dividends, according to the SeekingAlpha ETF screener, with the Vanguard Dividend Appreciation ETF (VIG) and the Vanguard High Dividend ETF (VYM) being the 1st and 2nd largest dividend ETFs respectively. I reviewed the international versions of these two Vanguard ETFs last month, but basically, VIG has a lower yield with a focus on dividend growth, while VYM focuses on higher dividend yields, and both charge just 0.06% per year. SCHD matches that 0.06% per year expense ratio, while currently boasting a higher dividend yield than VYM (3.5% vs 3.0%), and, per the fund website, a focus on "on the quality and sustainability of dividends". These features explain why the AUM of SCHD has almost completely caught up with that of VYM over the past two years, as show in the below chart also looking back over the past 10 years.
SCHD vs VOO: Comparing The Portfolios
You can get quick but very clear view of how different the portfolios of SCHD and VOO are simply by looking at their respective top 10 holdings, which perhaps surprisingly for two US large cap ETFs, have ZERO overlap. The top 10 components of SCHD make up about 40% of the portfolio, while the top 10 of VOO make up 30%. I'd argue this makes VOO more concentrated than SCHD, as SCHD only holds around 100 stocks versus VOO's portfolio of a little over 500, and also because VOO's top 10 holdings seem to be much more correlated than SCHD's top 10.
# SCHD VOO Ticker Security Name Weight Ticker Security Name Weight 1 AVGO Broadcom Inc. 4.27% AAPL Apple Inc. 7.70% 2 UPS United Parcel Service Inc. 4.16% MSFT Microsoft Corporation 6.80% 3 HD The Home Depot Inc. 4.03% AMZN Amazon.com Inc. 3.12% 4 PEP PepsiCo Inc. 4.01% NVDA NVIDIA Corporation 2.81% 5 CSCO Cisco Systems Inc. 4.01% GOOGL Alphabet Inc. 1.91% 6 TXN Texas Instruments Incorporated 3.99% TSLA Tesla Inc. 1.89% 7 ABBV AbbVie Inc. 3.97% META Meta Platforms Inc. 1.70% 8 KO The Coca-Cola Company 3.95% GOOG Alphabet Inc. 1.66% 9 AMGN Amgen Inc. 3.92% BRKB Berkshire Hathaway Inc. 1.63% 10 MRK Merck & Co. Inc. 3.81% UNH UnitedHealth Group Incorporated 1.20%
A higher-level view shows that about half of SCHD's stocks are also S&P 500 components held by VOO, also means that SCHD effectively excludes around 90% of the stocks in VOO, while including almost 50 other stocks not in VOO. I see this low level of overlap as a clear indicator of how far away from simple quality dividend growth much of the "core" S&P 500 has become, with 9 of the top 10 VOO holdings either paying no dividend or yielding less than 1%, with only UNH having a dividend yield matching the overall yield of VOO at a mere 1.5%. One concern I have long had about dividend-focused portfolios is that they may reach for those higher yields by overweighting low-growth utilities, REITs, or financials, but even here, we see SCHD is actually underweight two of these three sectors relative to VOO. SCHD does have a significant underweight to the technology sector, which is currently richly valued and low yielding, but its greatest overweight is to consumer staples, whose greatest growth headwinds is slowing global population growth, a topic which deserves a whole separate article.
For an even higher level comparison of the metrics of SCHD vs VOO, I also suggest a read through the SeekingAlpha comparison page of these two funds.
Scenarios of SCHD vs VOO Outperformance
For many investors, the bottom line of the decision between buying SCHD vs VOO comes down to which one the investor expects to outperform over his or her time horizon. Since I compared a few mutual fund predecessors of SCHD and VOO back in 2019, the Vanguard's S&P 500 fund has mostly caught up with the 25 year lead earned by the Fidelity Dividend Growth Fund (FDGFX) before the COVID-19 pandemic, and in my view, 2020, 2021, and 2023 have seemed more like the exception than the rule. My view is that a portfolio of higher-yielding stocks with some screen on dividend quality is likely to outperform the S&P 500 over most 25+ year time horizons, and that shorter periods where VOO outperforms SCHD, like this year, simply increases those odds for those buying now.
For investors to expect VOO to outperform SCHD over time, that investor would need to expect the top VOO components to continue delivering significantly higher growth for the next decade or two to make up for their lower initial yields. I'd start at the top with an estimate of Apple's future expected rate of return, which I expect to be relatively low, but several of the comments argue reasons why it might be higher.
Conclusion
For me, SCHD at an expense ratio of 0.06% per year is clearly a much better choice than VOO at 0.03% per year, and I see SCHD as a significant step in the right direction away from market cap weighted indexing. The main reasons I don't buy SCHD for myself or for clients are:
- I don't think SCHD's deviation from the index goes far enough, and I prefer to go deeper into smaller and higher yielding stocks, and to weight them more evenly.
- For US taxable accounts, I prefer the ability to tax loss harvest holdings within a portfolio, which is harder to do with a single fund like SCHD, and
- For non-US accounts in non-treaty countries like Hong Kong, SCHD is subject to a 30% withholding tax on dividends, which an Irish UCITS fund or stock option strategy can help mitigate.
For investors who want to keep it simple and have a single core US dividend fund though, I think you can do far worse than SCHD.
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