Two standard dividend-focused ETFs are the Schwab U.S. Dividend Fairness ETF (SCHD) and the Vanguard Excessive Dividend Yield ETF (VYM). Let’s evaluate them.
First, observe that I don’t chase dividends. However I acknowledge that many traders use dividends to complement their present revenue, notably in retirement. Others simply irrationally favor dividend-paying shares. In any case, these two high-yield funds are highly regarded and take a considerably completely different strategy. Right here we’ll evaluation these dividend ETFs and discover the variations between them.
In a rush? Listed below are the highlights:
- SCHD and VYM are two standard dividend-yield-focused ETFs from Schwab and Vanguard, respectively.
- SCHD launched in 2011 and VYM launched in 2006.
- Each are very inexpensive with the identical charge of 0.06%.
- Each are highly regarded and have important AUM, however VYM is barely extra standard than SCHD.
- SCHD seems for high-quality firms with a sustainable dividend by way of profitability screens.
- VYM is comprised of higher-than-average-dividend-yield shares, excluding REITs. It doesn’t care an excessive amount of about high quality.
- Since SCHD’s inception in 2011, it has delivered a better return than VYM with roughly the identical volatility.
- As we’d most likely count on, SCHD tends to ship rather more publicity to the Profitability danger issue.
- Dividend investing is essentially rooted within the Worth, Profitability, and Funding components, with considerably naive publicity to them.
SCHD vs. VYM – Methodology
SCHD is the Schwab U.S. Dividend Fairness ETF. It tracks the Dow Jones U.S. Dividend 100™ Index. This index is comprised of 100 shares with at the least 10 consecutive years of dividend funds and a minimal market cap of $500 million. Shares are then chosen for the index by screening for prime yield, profitability metrics, and 5-year dividend progress, excluding REITs. Particular person firms are capped at 4% and sectors at 25%.
The Vanguard Excessive Dividend Yield ETF (VYM) seeks to trace the FTSE® Excessive Dividend Yield Index. Its course of is fairly easy. Constituent shares are taken from the FTSE® All-World Index, excluding REITs, and ranked by forecasted dividend yield, after which the highest half are chosen for inclusion. As such, VYM’s choice methodology is rather more “free” than SCHD; SCHD is rather more stringent in shopping for what it believes to be high-quality firms with sturdy profitability and a sustainable dividend. Due to this, observe that SCHD solely has about 100 holdings whereas VYM has slightly over 400.
Due to this, as we’d most likely count on, VYM has barely extra loading on Worth however a lot decrease publicity to Profitability. Basically, SCHD is capturing extra worthwhile firms, however VYM is capturing comparatively cheaper firms. Common market cap (Measurement issue) and publicity to the Funding issue are roughly equal.
As we’d additionally most likely count on, SCHD has increased ESG/SRI scores, if you happen to care about that form of factor.
Dividend yield is comparable between these two funds, with SCHD’s being barely increased by about 0.25% on the time of writing.
SCHD vs. VYM – Composition
| SCHD | VYM | |
| Fundamental Supplies | 4.10% | 4.90% |
| Shopper Staples | 14.10% | 13.70% |
| Shopper Discretionary | 9.30% | 8.70% |
| Financials | 22.20% | 23.00% |
| Healthcare | 11.50% | 12.60% |
| Industrials | 14.50% | 9.20% |
| Power | 1.90% | 7.00% |
| Know-how | 18.90% | 10.00% |
| Telecommmunications | 0.00% | 3.30% |
| Utilities | 0.00% | 7.30% |
Discover how SCHD has zero or low publicity to Utilities, Telecom, and Power. These sectors are infamous for prime dividends however comparatively weak profitability, which is why SCHD’s screens exclude them however VYM nonetheless holds them.
SCHD vs. VYM – Efficiency Backtest
Each SCHD and VYM are extremely liquid and have the identical low expense ratio of 0.06%. Right here’s a efficiency backtest of those two funds going again to SCHD’s inception in 2011:
SCHD has delivered considerably higher returns than VYM over this comparatively quick time interval with roughly the identical volatility and a barely smaller max drawdown. Consequently, SCHD delivered a a lot increased risk-adjusted return. In equity, the Worth issue has suffered drastically over exactly the backtested time interval, however the small distinction in Worth loading between these funds wouldn’t absolutely clarify the distinction in CAGR.
That max drawdown was the March 2020 crash, from which SCHD shot out of the outlet a lot quicker than VYM. SCHD’s restoration time was roughly half that of VYM’s.
SCHD vs. VYM – Conclusion
I created a dividend-focused portfolio that comes with each of those funds that may be discovered right here.
However bear in mind what I famous in my comparability of VIG and VYM: Vanguard themselves investigated the methods of funds like these and concluded that their constituent shares’ efficiency was absolutely defined by their publicity to recognized fairness components like Worth, Profitability, and many others., so if you happen to don’t care about utilizing dividends as revenue, you could be higher off – when it comes to whole return – by merely investing in merchandise that particularly goal these components, like a small cap worth fund.
Do you maintain any of those ETFs in your portfolio? Let me know within the feedback.
Disclaimer: Whereas I like diving into investing-related information and taking part in round with backtests, I’m under no circumstances a licensed skilled. I’ve no formal monetary schooling. I’m not a monetary advisor, portfolio supervisor, or accountant. This isn’t monetary recommendation, investing recommendation, or tax recommendation. The data on this web site is for informational and leisure functions solely. Funding merchandise mentioned (ETFs, mutual funds, and many others.) are for illustrative functions solely. It’s not a advice to purchase, promote, or in any other case transact in any of the merchandise talked about. Do your individual due diligence. Previous efficiency doesn’t assure future returns. Learn my lengthier disclaimer right here.
