SCHD vs. VYM – Dividend ETFs from Schwab and Vanguard

Two popular dividend-focused ETFs are the Schwab U.S. Dividend Equity ETF (SCHD) and the Vanguard High Dividend Yield ETF (VYM). Let’s compare them.

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// TIMESTAMPS:

00:00 - Intro
00:33 - Methodology
02:11 - Composition
02:36 - Performance
03:17 - Conclusion
03:52 - Outro

// SUMMARY:

First, note that I don’t chase dividends. But I recognize that many investors use dividends to supplement their current income, particularly in retirement. Others just irrationally prefer dividend-paying stocks. In any case, these two high-yield funds are very popular and take a somewhat different approach. Here we’ll review these dividend ETFs and explore the differences between them.

SCHD is the Schwab U.S. Dividend Equity ETF. It tracks the Dow Jones U.S. Dividend 100™ Index. This index is comprised of 100 stocks with at least 10 consecutive years of dividend payments and a minimum market cap of $500 million. Stocks are then selected for the index by screening for high yield, profitability metrics, and 5-year dividend growth, excluding REITs. Individual companies are capped at 4% and sectors at 25%.

The Vanguard High Dividend Yield ETF (VYM) seeks to track the FTSE® High Dividend Yield Index. Its process is pretty simple. Constituent stocks are taken from the FTSE® All-World Index, excluding REITs, and ranked by forecasted dividend yield, after which the top half are selected for inclusion. As such, VYM’s selection methodology is much more “loose” than SCHD; SCHD is much more stringent in buying what it believes to be high-quality companies with robust profitability and a sustainable dividend. Because of this, note that SCHD only has about 100 holdings while VYM has a little over 400.

Because of this, as we’d probably expect, VYM has slightly more loading on Value but much lower exposure to Profitability. Essentially, SCHD is capturing more profitable companies, but VYM is capturing comparatively cheaper companies. Average market cap (Size factor) and exposure to the Investment factor are roughly equal.

Dividend yield is similar between these two funds, with SCHD’s being slightly higher by about 0.25% at the time of this video.

But remember what I noted in my comparison of VIG and VYM: Vanguard themselves investigated the strategies of funds like these and concluded that their constituent stocks’ performance was fully explained by their exposure to known equity factors like Value, Profitability, etc., so if you don’t care about using dividends as income, you may be better off – in terms of total return – by simply investing in products that specifically target those factors, like a small cap value fund.

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