VIG vs SCHD: Which Dividend ETF is Better? - Physician on FIRE (2024)

SCHD and VYM are two Vanguard ETFs geared towards generating dividends.

SCGH invests in the Dow Jones U.S. Dividend 100 Index. In contrast, VIG is more focused on the historical performance of stocks and investing in those companies to ensure a dividend return.

Should you invest in VIG vs SCHD?

In this post, we’ll compare VIG vs SCHD diversification, expense ratio, tax efficiency, and performance to help you decide.

What is VIG?

VIG, also known as the Vanguard Dividend Appreciation ETF, tracks the performance of the S&P U.S. dividend growers index. The fund is passively managed and attempts to fully replicate the index portfolio and performance.

The Index is designed to invest in companies that have consistently increased yearly dividends for the last ten consecutive years. An important note is that the index excludes the top 25% of the highest-yielding companies.

What is SCHD?

The Schwab U.S. Dividend Equity ETF or SCHD is a dividend ETF offered by Charles Swab Asset Management. The objective of the ETF 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.

VIG vs SCHD

Diversification – Slight Edge to SCHD

VIG and SCHD are ETFs that aim to generate a high dividend yield but reach their objective using different portfolio diversification strategies. The table below compares VIG and SCHD in terms of industry diversification.

We can see that VIG is more concentrated in information technology, health care, and financials. While SCHD is more concentrated in industrials, health care, and financials.

These portfolios have different industry concentrations. For example, one of the biggest differences is information technology, where VIG holds 22% while SCHD holds 12%. Likewise, VIG holds 3.5% in the energy sector while SCHD holds 10%.

These industry differences also result in very different top 10 holdings between the two funds.

The table above shows that VIG and SCHD have only one common stock among their top 10 holdings: Broadcom Inc.

We can also see that SCHD is more concentrated in the top 10 holdings, holding 40% in the top 10, while VIG only holds 32%. This aligns with the total holdings since SCHD only holds approximately 100 stocks, while VIG holds approximately 300 stocks.

Overall, SCHD is more diversified among different sectors of the economy, but it is more concentrated in its top 10 holdings.

Both ETFs provide a well-diversified portfolio that is not heavily concentrated in one sector or stock.

Minimum Investment – Tie

VIG and SCHD are both ETFs with a minimum investment of $1.00. Since ETFs can be traded daily, they have a low investment minimum of $1.00 and sometimes less.

Both of these funds are highly accessible to investors and available by many brokerage firms, making them easy to invest in.

Both funds are ideal for any investment level.

Expense Ratio – Tie

Expense ratios are important because they determine how much you will pay from your returns to the fund for operating your portfolio.

VIG and SCHD have an expense ratio of 0.06%. This is important because although they have a different number of stocks and follow different indexes, they have the same expenses.

While Vanguard is known for its low expense ratios, Charles Schwab delivers an ETF comparable to the SCHD, eliminating any potential cost concerns.

Trading and Liquidity – Tie

VGI and SCHD are ETFs and, thus, have the same trading and liquidity characteristics.

You 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). This benefit of ETFs doesn’t come without drawbacks, though – given that ETFs can trade throughout the day, 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 important to consider the tax implications and not only the returns they generate. The tax implications of an investment can have a huge 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. However, this is not a concern with Vanguard ETF and mutual funds due to their patented process. This makes Vanguard ETFs and mutual funds tax equivalent to each other.

It’s important to consider that whichever ETF generates a higher dividend yield will also generate a higher tax burden. For VIG and SCHD as of 2023 that is SCHD. This means for 2023, SCHD will generate a higher tax burden than VIG.

Tax Loss Harvesting – Tie

As ETFs, both 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. You may have to wait one or two days before you have access to the funds, which is commonly referred to as T+2.

Performance & Dividends – Advantage to SCHD

Let’s examine the difference between how these two ETFs perform. The table above shows the total returns for both VIG and SCHD.

SCHD has outperformed VIG in five out of the last nine years. Most notably, in the last two years, 2022 and 2021, SCHD has outperformed VIG by approximately 6%. On average, over the last nine years, SCHD has outperformed VIG by only 1.44%.

Next, let’s thake a look at SCHD and VIG’s dividend yield.

The table above shows that SCHD has outperformed VIG every year over the last eleven years. Since 2019, SCHD has outperformed VIG dividend yield by over 1%, with 2023 being 1.63% and 2022 being 1.30%. On average, over the last 11 years, SCHD has outperformed VIG by 1% each year.

Overall, SCHD has the advantage in performance. It generates higher returns and a higher dividend yield. These differences in returns and dividend yield have increased over the last four years.

VIG vs SCHD: Who Should Invest?

VIG and SCHD both aim to generate dividends by investing in stocks that show high growth in dividend yield or above-average dividend yield.

While they aim for the same goal to generate a high dividend, they use two different indexes as a baseline. VIG uses the S&P U.S. Dividend Growers Index, which comprises approximately 300 stocks, while SCHD uses the Dow Jones U.S. Dividend 100 Index, which consists of only 100 stocks.

The two indexes result in different portfolio diversifications. SCHD is more diversified between the different industries. The top three industries only account for 45% compared to 56% for VIG. However, SCHD is more concentrated in the top 10 stocks, accounting for 40% of the portfolio compared to 32% for VIG.

Another key distinction between these two portfolios is their performance. First, SCHD has a clear advantage over dividend yield. Over the last ten years, SCHD has outperformed VIG by over 1%.

Compared to total annual returns over the last nine years, SCHD only outperformed VIG by 1.44%.

VIG and SCHD are nearly identical in tax loss harvesting rules, expense ratios, and minimum investments. However, if the priority is higher dividend yields and more diversification, then SCHD is the better option.