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VYM vs SCHD: Where Should You Invest?

VYM vs. SCHD vs: Which should you invest in?

VYM and SCHD are two ETFs that are some of the market’s highest-performing and well-known dividend ETFs.

Both of these ETFs aim to generate quality and sustainable dividends. VYM tracks the performance of the FTSE High Dividend Yield Index, while SCHD tracks the performance of the Dow Jones U.S. Dividend 100 Index.

 

But how do you decide which one is best for you?

 

In this post, we’ll compare VYM and SCHDs diversification, performance, fees, and tax efficiency to help you decide.

 

What is VYM?

 

VYM, or Vanguard High Dividend Yield ETF, tracks the performance of the FTSE High Dividend Yield Index. The stock is passively managed, and attempts are made to fully replicate the index portfolio and performance.

 

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Based on the FTSE All-World index, the index invests in stocks characterized by higher-than-average dividend yields. It combines forecasting and historical data.

 

What is SCHD?

 

The Schwab U.S. Dividend Equity ETF, or SCHD, is a dividend ETF offered by Charles Swab Asset Management. Its objective is to track the performance of the Dow Jones U.S. Dividend 100 Index.

 

The Dow Jones U.S Dividend 100 Index measures the performance of high-dividend-yielding stocks in the U.S. that have shown a consistent record of paying high dividends. The SCHD ETF aims to generate quality and sustainability of dividends.

 

VYM vs. SCHD Summary

 

VYM SCHD Edge
Fund Type ETF ETF Tie
Diversification FTSE High Dividend Yield Index Dow Jones U.S Dividend 100 Index Tie
Inception Date 2006 2011 VYM
Number of Holdings 454 104 VYM
Risk Rating Moderate Moderate Tie
Minimum Investment $1.00 $1.00 Tie
Expense Ratio 0.06% 0.06% Tie
Tax Efficiency ETFs generally are more tax-efficient ETFs generally are more tax-efficient Tie
Tax Loss Harvesting Funds must settle and may need 1-2 days to be available for reinvestment Funds must settle and may need 1-2 days to be available for reinvestment Tie
Trading and Liquidity Daily trading during Market Hours Daily trading during Market Hours Tie
Performance 6.57% in 2023 4.57% in 2023 VYM
Dividend Yield 3.08% in 2023 3.49% in 2023 SCHD

 

Diversification

 

VYM and SCHD are ETFs aimed at generating consistent dividend payments, but they follow two different indexes and have different investment strategies.

 

Industry VYM SCHD
Industrials 12.10% 17.14%
Financials 21.65% 16.73%
Health Care 12.53% 15.90%
Information Technology 10.92% 12.58%
Consumer Staples 13.43% 11.95%
Consumer Discretionary 6.85% 9.41%
Energy 9.92% 9.25%
Communication Services 3.58% 4.35%
Materials 2.42% 2.31%
Utilities 6.60% 0.39%
Real Estate 0.01% 0.00%

 

The table above shows the diversification for each ETF by industry. We can see that VYM is heavily concentrated in the financial industry, with 21.65% of the portfolio. The other two largest industries are consumer stables and healthcare.

 

The SCHD industry with the highest concentration is industrials, with 17.14%, and financials and healthcare are the other two largest industries.

 

That said, while SCHD is more evenly spread between its top three industries, it does have a higher concentration in those industries. SCHD’s top three industries account for 50% of the portfolio, whereas VYM’s account for 48%.

 

Company VYM SCHD
JPMorgan Chase & Co 3.48%
Broadcom Inc 3.41% 4.44%
Exxon Mobil Corp 2.87%
Johnson & Johnson 2.68%
The Home Depot Inc 2.46% 4.17%
Procter & Gamble Co 2.45%
Merck & Co Inc 1.96% 4.04%
AbbVie Inc 1.94% 4.19%
Chevron Corp 1.77% 3.88%
PepsiCo Inc 1.66% 3.80%
Texas Instruments Inc
4.17%
Amgen Inc 4.05%
Cisco Systems Inc
3.94%
Coca-Cola Co 3.79%
Total 24.68% 40.47%

 

The table above shows the top 10 holdings for VYM and SCHD. SCHD and VYM hold only 6 of the same top 10 holdings. In addition, SCHD is highly concentrated in the top 10 holdings, with 41% of assets allocated to them. VYM, on the other hand, invests only 25% of its assets in the top 10 holdings.

 

Overall, when comparing both ETFs, VYM is more diversified in its top holdings and other holdings. While both are well diversified among different industries, VYM is less concentrated.

 

Minimum Investment – Tie

 

Both VYM and SCHD require a minimum investment of $1.00. Since these are both ETFs, they can be traded on fractional shares, allowing for even the smallest investment. For most Vanguard ETFs, minimum investments are $1.00 and have minimum fees, making investing in either VYM or SCHD easy.

 

Expense Ratio – Tie

 

VYM and SCHD both have an expense ratio of 0.06%. The industry average expense ratio is 0.25%, and both VYM and SCHD are inexpensive compared to many other ETF alternatives. Also, considering Vanguard has one of the lowest expense ratios on the market, SCHD is able to maintain that and meet it.

 

Trading and Liquidity – Tie

 

Since they are both ETFs, VYM and SCHD have the same trading and liquidity characteristics.

 

Investors can buy and sell ETFs throughout the day at any time during market hours. This is not the case with mutual funds, which are only traded at the end of the day based on Net Asset Value (NAV).

 

ETFs’ trading flexibility doesn’t come without drawbacks, though—they typically trade at prices slightly different from their NAV. This difference is called a bid-ask spread.

 

ETFs offer an advantage to investors who trade daily or change positions frequently. Since they can trade throughout the day, whereas mutual funds, you have to wait until the day is closed.

 

Tax Efficiency – Tie

 

When comparing two different investment options, it’s essential to consider the tax implications and not only the returns they generate. The tax implications of an investment can have a significant impact on which investment generates higher after-tax returns.

 

Generally, ETFs will have a slight edge from a tax efficiency perspective. ETFs tend to distribute comparatively fewer capital gains to shareholders – these same gains are simply more challenging to manage efficiently from a mutual fund.

 

Since both VYM and SCHD are ETFs, they offer the same tax advantages and efficiencies.

 

Tax Loss Harvesting – Tie

 

As ETFs, both SCHD and VYM have the same rules and regulations.

 

Tax-loss harvesting is a strategy that involves selling investments at a loss to offset gains (and up to $3,000 in ordinary income). Tax-loss harvesting only matters in taxable investment accounts since you aren’t taxed on capital gains in tax-deferred accounts.

 

While this strategy can be implemented using any type of investment (stocks, ETFs, mutual funds, or other property), mutual funds have an advantage because of how they are traded.

 

When you sell an ETF, you’ll have to wait for the funds to settle before reinvesting the proceeds. This wait, commonly referred to as T+2, may be one or two days before you can access the funds.

 

Performance & Dividends – VYM (Returns), SCHD (Dividend Yield)

 

The performance of an investment option is often one of the most critical aspects investors consider. The table below shows the total annual returns between VYM and SCHD.

 

Since both ETFs are aimed at generating dividends, the annual returns they generate are not always a focus since that is not their objective.

 

Total Return by NAV
Year VYM SCHD Delta
2023 6.57% 4.57% -2.00%
2022 -0.46% -3.23% -2.77%
2021 26.21% 29.87% 3.66%
2020 1.14% 15.08% 13.94%
2019 24.07% 27.28% 3.21%
2018 -5.91% -5.56% 0.35%
2017 16.42% 20.83% 4.41%
2016 17.05% 16.44% -0.61%
2015 0.28% -0.31% -0.59%
2014 12.69% 11.69% -1.00%

 

From the table above, you can see that VYM and SCHD’s annual returns have been all over the place over the last ten years. Over that period, VYM outperformed in five years, and SCHD outperformed in five years. With that said, VYM may have a small advantage, considering that it has outperformed SCHD over the last two years.

 

The table below will show the dividend yield for both ETFs.

 

Year VYM SCHD Delta
2023 2.46% 3.49% 1.03%
2022 2.75% 3.58% 0.83%
2021 2.94% 3.15% 0.21%
2020 2.85% 2.87% 0.02%
2019 3.70% 3.34% -0.36%
2018 3.12% 2.91% -0.21%
2017 2.92% 2.66% -0.26%
2016 2.91% 2.85% -0.06%
2015 3.07% 2.82% -0.25%
2014 2.98% 2.57% -0.41%

 

The table shows that VYM has outperformed SCHD in dividend yield in 6 out of the last ten years by an average of 0.26%. While this is true, SCHD has outperformed in the last four years, from 2020 to 2023, by an average of 0.52%.

 

Based on the last four years, SCHD has consistently outperformed VYM. If you follow the trend, SCHD is more likely to provide a higher dividend yield than VYM based on its latest portfolio.

 

VYM vs SCHD: Where Should You Invest?

 

VYM and SCHD are ETFs that aim to generate consistent, high-quality dividends. So, how do you decide which dividend ETF to invest in?

 

First, VYM and SCHD are similar in many ways, including expense ratio, minimum investment, tax efficiency, tax loss harvesting, and trading. This makes deciding which one is best for you much easier.

 

The key differences between these two ETFs are their diversification strategy, performance, and who they are managed by.

 

First, Vanguard offers VYM, and Charles Schwab offers SCHD. Both are some of the most well-known investment companies today and are great choices.

 

The second difference is the diversification strategy. VYM uses the FTSE High Dividend Yield Index, and SCHD uses the Dow Jones U.S Dividend 100 Index. Based on our analysis, both are well-diversified ETFs, although VYM is a bit more diversified, especially since it has four times as many holdings as SCHD.

 

The biggest difference is performance. While annual returns are typically the measure of an ETF’s performance, we will focus on the dividend yield for a dividend ETF. SCHD and VYM generate similar dividend yields. For example, over the last 10 years, there has only been an average difference of 0.36%

 

Based on the latest performance, SCHD has outperformed VYM consistently over the last four years by 0.52% on average. On the other hand, from 2014 to 2019, VYM outperformed SCHD by 0.26%.

 

Overall, if you are looking to optimize your dividend yield, both SCHD and VYM are great options. However, the trends from 2022 to 2023 indicated that the SCHD is more likely to outperform VYM.

 

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