SCHD is a great dividend ETF: Here’s why I like VIG more

The Schwab U.S. Dividend Equity ETF (SCHD) fund has underperformed the market this year despite the elevated inflows. The stock has jumped by less than 1% while the SPDR S&P 500 (SPY) fund jumped by more than 17.50%. Other popular ETFs like Invesco QQQ and iShares Core Dividend Growth (DGRO) rose by 44% and ~7.50%, respectively.

Schwab U.S. Dividend Equity ETF vs bonds

The SCHD ETF is one of the most popular ETFs in the market with over $49 billion. Data compiled by ETF shows that the fund has grown by over $8.9 billion this year. Most of these gains happened in the first two months of the year. Recently, the fund’s inflows have been a bit low.

The SCHD has underperformed the market for the simple reason that it does not track the high-flying technology companies. Unlike funds like SPY and QQQ, it does not have the so-called Magnificent 7 companies like Microsoft, Nvidia, Tesla, and Apple. Instead, most of its biggest companies are industrials, health care, financial, and consumer staples.

The Schwab U.S. Dividend Equity ETF is well-known for its high dividend. Its 30-day dividend yield is 3.56% while the TTM yield stands at 3.58%. Therefore, a common question is whether investors should just pack their funds in American bonds.

For one, one-year Treasuries have a 5.32% yield while the 2-year has a yield of 4.77%. Even the benchmark 10-year is yielding at 4%. Therefore, investing in bonds seems like the better option for most people.

But comparing bonds and stocks is not always straightforward since bonds generate a fixed yield. Investing in the SCHD ETF, on the other hand, is a bet on both dividend returns and corporate growth.

VIG ETF is a better investment

The SCHD ETF has is a great fund that has had excellent returns over the years. However, I believe that there are better investments out there. In my previous article, I wrote that the SPDR S&P 500 ETF is better. 

Another ETF I recommend is the Vanguard Dividend Appreciation (VIG) fund. While the two funds have a similar goal, they use different approaches to this. SCHD invests in companies that have solid dividend returns. Most of its constituents have minimal revenue growth.

VIG, on the other hand, invests in companies that have a good track record on giving dividends. And most importantly, it allocates funds to companies that have consistent revenue growth like Microsoft, Apple, Visa, and Qualcomm among others. 

Watch here: https://www.youtube.com/embed/S4clChqDEVk?feature=oembed

Other large constitute the fund are Exxon Mobil, Johnson & Johnson, Procter & Gamble, and Broadcom. Each of these firms has a strong market share in their industries.

Therefore, because of this, the SCHD ETF has a better dividend yield than VIG, which has 1.78%. Still, I believe that the small dividend yield in the VIG is compensated by the fund’s growth. 

To be clear. I still believe that investors should invest in popular funds like SPY and QQQ that have a long track record of performance. But when comparing between SCHD and VIG, I believe that the latter is a better buy.

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