SCHD Vs. VYM: 3 Reasons Why One Is The Better ETF Pick (NYSEARCA:SCHD) (2024)

The Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) and the Vanguard High Dividend Yield Index Fund ETF Shares (VYM) are two of the most popular choices for dividend investors with slightly different investment angles. While the Schwab U.S. Dividend Equity ETF chiefly focuses on a highly-concentrated portfolio of dividend-paying stocks that have a history of dividend growth, the Vanguard High Dividend Yield Index ETF invests, as the name implies, in stocks that offer a high dividend yield. I will discuss why I currently prefer the Schwab U.S. Dividend Equity ETF over the Vanguard High Dividend Yield Index ETF and why the first offers a better investment deal for dividend investors, in my opinion!

Previous coverage

I worked on the Schwab U.S. Dividend Equity ETF in early October and recommended the ETF to dividend investors as it traded near 1-year lows at the time. I recommended SCHD in October due to the technical sentiment that was overly bearish at the time. The Federal Reserve's pivot to a low-rate world makes SCHD compelling as an income investment as well, chiefly because the ETF invests in large-cap companies that can be expected to do well in a growing economy. With the U.S. economy growing 3.3% in Q4'23, I believe SCHD will continue to be an attractive bet for income investors in 2024. The ETF price has appreciated 11% since, but the exchange-traded fund is a top bet on an expanding economy. It also has a couple of advantages of the Vanguard High Dividend Yield Index ETF that I will discuss.

Fund strategies and outperformance potential

The Schwab U.S. Dividend Equity ETF invests in U.S. dividend stocks and tracks the Dow Jones U.S. Dividend 100 Index while the VYM also invests in U.S. dividend stocks, but tracks the FTSE High Dividend Yield Index. The Dow Jones U.S. Dividend 100 Index measures the performance of dividend-paying stocks in the U.S. while the FTSE High Dividend Yield Index is more broadly positioned and includes high-yield stocks from abroad. The latter also has a significantly larger portfolio (in terms of investments) which includes 456 stocks compared to just 104 for the SCHD.

The SCHD, however, is more concentrated (which I will discuss below) and therefore may do better in a rising market… which I expect to happen given that the Federal Reserve is set to deliver a couple of rate cuts. The U.S. economy appears to enter 2024 with some momentum as well given the recent GDP report. While past performance is no guarantee of future performance, SCHD's better long-term returns indicate that the concentration approach has worked quite well for the ETF.

3 reasons why SCHD is way better than VYM

Both are ETFs and appear to be similar in many ways: they invest in dividend-paying stocks and the portfolio has a bit of overlap as well, meaning the Schwab U.S. Dividend Equity ETF and the Vanguard High Dividend Yield Index ETF invest in the same securities. However, the SCHD has major advantages, in my opinion, which makes it a preferred investment choice for dividend investors in 2024 and beyond.

1. SCHD outperforms VYM over long periods of time

The first advantage is that those ETFs that have stronger long-term performance records are deserving of more investor trust and also have an easier time attracting a larger amount of investor capital. The Schwab U.S. Dividend Equity ETF delivered an 11.03% annual NAV return in the last ten years and 13.03% since inception… which gives the SCHD a considerable performance advantage over the Vanguard High Dividend Yield Index ETF. Over a ten-year period, this has led to a performance differential between SCHD and VYM in the amount of 30 PP (see top chart of this article).

The VYM, on the other hand, delivered 9.38% NAV returns over the last 10-year period and only 8.11% since its inception. The VYM has been around a bit longer (since 2006) than the SCHD (inception year: 2011), but the SCHD nonetheless beats the VYM in a direct performance comparison hands down: it has produced a 1.65% higher average annual return than the VYM in the last ten years. The SCHD also outperformed VYM during a time span that included the pandemic, a high-stress period for equities, which further adds to the ETF's appeal.

2. SCHD has a higher top-ten concentration

The second advantage is that SCHD has a larger weighting (42%) of its top ten holdings in its portfolio which includes the strongest dividend stocks that have paid dividends for years, and in some cases, for decades. These top ten holdings include companies like Broadcom Inc. (AVGO), Verizon Communications Inc. (VZ), and Amgen Inc. (AMGN) and generally consist of companies that offer both high dividend yields and have prospects for dividend growth.

The top ten holdings of the VYM are much less concentrated (25%), but some names in the ETF's top ten holdings are the same as SCHD's top holdings. The VYM includes telecommunications companies like Broadcom as well as pharmaceutical investments, like Merck & Co., Inc. (MRK) or Pfizer Inc. (PFE) that have low earnings and cash flow volatility and therefore provide ETF investors with attractive dividend income as well.

I like the overweighting of the SCHD's top ten holdings because it includes industry leaders who have shown an ability to grow their dividends during different market environments, including during the pandemic. I also like the fact that the SCHD does not overweight energy companies, as opposed to the VYM. Energy companies generally face highly volatile, market-dependent earnings prospects, and their dividends can be cut during an extraordinarily severe earnings contraction.

3. SCHD has a yield advantage

The third reason why I would prefer the SCHD in FY 2024 is that despite VYM having a high-yield focus in its investment orientation, the SCHD actually offers dividend investors a higher yield which obviously will make a huge difference over time, especially when dividends are reinvested.

The SCHD currently yields 3.5% while the VYM yields 3.1%, so the SCHD yields approximately 0.4 PP more. However, since the SCHD is chiefly focused on dividend growth (vs. high yield for the VYM), the Schwab U.S. Dividend Equity ETF may be a better bet for investors that seek to invest for the long term and reinvest their dividends. The longer-term (10-year) performance comparison shows that the SCHD outperformed the VYM quite significantly on both a price and total return basis…

This advantage matters even more for dividend investors that want to take into account the impact of inflation. Inflation has been a major headache for investors in the last two years and the higher the yield that an ETF offers from the get-go, the better. The yield of the SCHD currently already exceeds the inflation rate which makes the Schwab U.S. Dividend Equity ETF more attractive from an inflation hedge point of view…

SCHD also has a small valuation advantage

ETFs are valued and traded at net asset value which is the sum of net asset values of the underlying fund holdings. The SCHD and the VYM have both seen an increase in their net asset values over the long term, as demonstrated above. The SCHD also currently has a very small valuation advantage over the VYM as the former trades at a 0.04% discount to its net asset value.

Risks with SCHD and VYM

Both ETFs own large equity portfolios, have considerable investment holding overlap and they both charge investors the same expense ratio of 0.06%, meaning performance differences ultimately relate to changes in investment strategy. The SCHD and the VYM also have considerable exposure to procyclical sectors such as Financials and Industrial (about 34% each) which means both sectors are at risk of underperforming if those sectors were especially hit hard by a recession.

The SCHD also owns less stocks in its portfolio (104 vs. 456 for the VYM) and, as we discussed, the SCHD is more concentrated, meaning there is a risk that the Schwab U.S. Dividend Equity ETF could underperform in a falling market. Both the SCHD and VYM have equity and earnings risk and there is no guarantee that both ETFs will continue to earn similar or better returns than they did in the past.

I am monitoring the top ten concentrations in both ETFs and the annual NAV returns for both exchange-traded funds. Given that the SCHD has a higher top-ten investment concentration my expectation is for the ETF to deliver a strong(er) performance in a rising economy and stock market. Given that the U.S. economy is doing extremely well right now, my expectation is for the SCHD to outperform the VYM in 2024, under the assumption that economic growth doesn't slow and inflation continues to moderate.

Final thoughts

In a direct comparison between SCHD and VYM, I believe the Schwab U.S. Dividend Equity ETF comes out as a clear winner. The SCHD has not been in operation as long as the VYM has, but it has achieved a significant average annual return advantage. The Schwab U.S. Dividend Equity ETF's investment portfolio is much more concentrated in high-quality stocks relative to the Vanguard High Dividend Yield Index ETF which I believe has served the ETF well over time. The real advantage, I believe is that the SCHD offers dividend investors a 0.4 PP higher yield, despite the VYM being more focused on high-yield stocks. From an inflation hedge as well as a compounding perspective, I would definitely prefer the Schwab U.S. Dividend Equity ETF as well!

The Asian Investor