VYM Vs. SCHD: Comparing High Yield To Dividend Growth
Dec. 07, 2021 8:26 AM ET
Schwab Strategic Trust - Schwab U.S. Dividend Equity ETF (SCHD),
VYM31 Comments25 Likes
Summary
- VYM & SCHD are two great ETFs offering low cost, diversity, and strong dividend performance.
- Investors should use Seeking Alpha's wide range of comparison tools to evaluate ETFs that fit their overall strategy.
- Dividend Growth can outperform Dividend Yield in the long run, you just have to know where to look.
- SCHD is an excellent option if you are looking for a great balance between dividend yield and growth.
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Introduction
I love dividends, and in particular, dividends that pay me more and more money over time. Nothing is better than those quarterly, or even monthly, payments of cold hard cash straight into my investment account.
So maybe waking up and seeing your favorite meme stock up 100% overnight is a little better, but for the long-term investor looking to achieve growth in passive income, dividends are the sweet nectar of the gods.
I'm not suggesting that you can throw out the underlying performance of a given stock or ETF, but in this article, I attempt to simplify how one should analyze ETF dividends and where yield diverges from growth over time.
Chasing Yield, Growth, or... Both?
I have chosen to use the Vanguard High Dividend Yield ETF (
VYM) as my proxy for Dividend Yield and the Schwab U.S. Dividend Equity ETF (
SCHD) as my proxy for Dividend Growth. Both have over $30B in assets under management, a low expense ratio of 0.06%, and greater than 10 years of history for us to analyze.
Okay, so before I get several comments, yes, SCHD has a starting yield of 2.9% which is higher than VYM of 2.76%. Maybe you see where this is going already, but let's work through it since there are some key differences that may lead an investor to favor one over the other.
Reasons to Select a "High Dividend Yield" ETF
- Have a shorter term horizon.
- Value the immediate cash flow at a higher rate.
- Perhaps are retiring soon or are already retired so taking the time to wait for dividend growth is not as favorable.
- Want a diverse selection of quality companies with a long history of paying consistent dividends.
Reasons to Select a "Dividend Growth" ETF
- Have a longer-term horizon.
- Looking for passive income that grows over time.
- Have plenty of time until you plan on using the dividends for everyday cash flow so you can benefit from the growth over time.
- Want a diverse selection of quality companies with a long history of paying consistent dividends.
So, where do you fall on the dividend spectrum? Why is there even a dividend spectrum when you can have the best of both worlds?
A Simple Way To Evaluate Dividend ETFs
When looking at either dividend stocks or ETFs for my portfolio, I like to start with a couple of tools on Seeking Alpha.
First, I use the "Peers" tab to create a great comparison of similar stocks. More specifically, I like to look at the Dividends section.
(Source:
Seeking Alpha)
As you can see, I have added some additional ETFs to the comparison tool that I feel fit the general narrative of this article.
Not only can you see here that SCHD offers a higher starting yield of 2.9%, but it also has a much higher 5yr dividend growth rate of 14.55%. More on this below, but these are even much better dividend metrics compared to the SPDR S&P 500 (
SPY).
Secondly, I'll look at the Performance section to compare the price performance of the ETF over time. After all, dividend yield or growth doesn't mean much if you are giving up substantial performance in the long run.
(Source:
Seeking Alpha)
Looking at the same group of ETFs, SCHD again outperforms VYM going back 3, 5, and 10 years while underperforming SPY in the same periods. The Vanguard Dividend Appreciation ETF (
VIG) is the only other ETF to outperform SCHD in this comparison but also gives up substantial ground in dividend yield and growth.
Lastly, I look at the holdings to get a sense of diversification and quality of the underlying stocks behind the ETF.
(Source:
Seeking Alpha)
Just off the top, VYM has a much higher number of holdings than SCHD and assets in the top 10 of VYM only represent 23.73% of the total holdings. This points to much wider diversification for VYM as compared to SCHD. However, SCHD still has 105 holdings which generally should be considered more than diverse enough for the majority of investors.
Where the two ETFs really diverge is in their turnover ratio with SCHD at a much higher percentage of 46%. This implies that there is more active management taking place to keep the right balance of holdings in the ETF to achieve the high dividend growth rate that SCHD offers.
Yield On Cost
There is nothing more important to me as a dividend growth investor than evaluating yield on cost for any position in my portfolio. While we can't predict the future, we can still look at past history to get a sense of how an ETF grows their dividend and, ultimately, can yield you a higher amount per dollar invested today.
VYM 10yr Yield on Cost
(Source: VYM Dividend Page on
Seeking Alpha)
SCHD 10yr Yield on Cost
(Source: SCHD Dividend Page on
Seeking Alpha)
What these two charts show is that $1 invested in VYM 10 years ago would now be yielding 6.75% whereas the same $1 invested in SCHD would now be yielding 8.64%. This, of course, is due to SCHD's much higher dividend growth rate during the same time period.
All else constant, SCHD would be a much better investment than VYM given they have the same expense ratio, SCHD's higher dividend growth rate, and better price performance over the last 10 years.
Total Return
The last thing that is great to do is to use the portfolio comparison tool on Seeking Alpha to analyze total return which accounts for capital appreciation as well as dividends.
(Source: Seeking Alpha)
This chart is filtered on a 3yr basis, but you can also look at 5yr and 10yr as well. You can see VYM lags the other ETFs I have used as a point of comparison in all time periods. DGRW and DGRO are less than 10 years old, so they do not have the 10yr total return data yet.
Conclusion
There are many great low cost ETF products out there and investors should always do a full evaluation with an assessment based on their goals and time horizon. Just because an ETF is named "high yield," "growth," or "appreciation" does not necessarily mean it is completely optimized to meet your particular investment profile.
As I have demonstrated, SCHD is a great ETF with balance of dividend yield and growth. I highly recommend it be considered by investors with a long-term horizon, low risk profile, and that value diversified dividend growth.
Look for a future article comparing the performance of SCHD to holding individual stocks that offer high dividend growth.
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