Dividend ETFs are enjoying a comeback, but only one of these two funds has a clear advantage.
Dividend ETFs are enjoying a comeback, but only one of these two funds has a clear advantage.
With long-term bond yields now well above 5%, fixed income is posing a real alternative to traditional dividend stock exchange-traded funds (ETFs). Treasury yields are now more than twice those of many dividend ETFs, which means the target is changing for what type of fund you want to own and why.
The two most prominent high-yield equity ETFs are the Schwab U.S. Dividend Equity ETF (SCHD +1.02%) and the Vanguard High Dividend Yield ETF (VYM -0.03%). Between the two, I'd clearly favor the Schwab U.S. Dividend Equity ETF.
It's outperforming the Vanguard High Dividend Yield ETF by more than 12% year-to-date, but that's not the primary reason I'm choosing it.
The Schwab ETF's stock selection strategy considers several fundamental balance-sheet strength metrics, the stock's historical dividend growth rate, and its yield. That mix of factors helps the fund offer a solid 3.3% dividend yield.
The Vanguard ETF, on the other hand, selects stocks purely based on yield. It starts with a broad U.S. equity universe and invests in the top half of yields within that group. There's no consideration for the quality of dividend growth in its process. Its 2.4% yield is also substantially lower.
But portfolio composition is the deciding factor. With rates already high and potentially going higher, rate-sensitive sectors become especially vulnerable. The Vanguard High Dividend Yield ETF has greater allocations to financials, utilities, and tech, all of which are sensitive to interest rate movements.
The Schwab U.S. Dividend Equity ETF, however, is mostly overweight to consumer staples and healthcare, two sectors likely to be more defensive and durable in the event of an economic downturn.
With a higher yield, a strong track record, and a portfolio built better for current macro conditions, the Schwab U.S. Dividend Equity ETF would be my preferred dividend ETF to own.
David Dierking has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool has positions in and recommends Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.
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