Key Points
- With cash yields declining and a Fed rate hike unlikely, income investors are increasingly turning to dividend-focused ETFs like VYM and SCHD.
- VYM offers broader diversification across more than 600 stocks and a higher current yield of 2.26%, appealing to investors prioritizing stable income.
- SCHD applies stricter selection criteria, holds about 100 concentrated dividend-growth stocks, and yields 3.23%, suiting investors focused on long-term compounding.
- Special Report: Is the America you planned on retiring in, slipping away?
For a couple of years now, it has been harder to find strong yields in fixed-income securities. Since cash yields reached their cyclical peaks in late 2023 and early 2024, annual percentage yields (APYs) on cash alternatives like certificates of deposit (CDs) and high-yield savings accounts have generally moved lower, even as bond yields remain volatile.
And while the Federal Reserve’s July FOMC meeting is still weeks away, income investors hoping that an uptick in inflation will be enough to motivate the central bank to hike rates shouldn’t hold their breath. According to the CME Group’s FedWatch Tool, the probability of the Fed maintaining its benchmark interest rate in the 350–375 basis point range is more than 73%.
Fortunately, the equity market has no shortage of yield-focused exchange-traded funds (ETFs) that can help fill the gap. But understanding how two of the most popular dividend ETFs operate is essential to ensuring the right one ends up in your portfolio.
Should You Prioritize Broad Yield Exposure or Dividend Quality?
When it comes to deciding between the Vanguard High Dividend Yield ETF (NYSEARCA: VYM) and the Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD), there is no right or wrong answer.
While income investors share an affinity for yield, they aren’t a monolith. Retirees looking to supplement their income from Social Security benefits may opt for a higher payout, prioritizing stable portfolio income and broad diversification. On the other hand, younger investors may focus more on total return, compounding, and dividend-growth discipline.
That distinction is one of the biggest differences between VYM and SCHD. While both offer low-cost, large-cap exposure—the former carries an expense ratio of just 0.04%, while the latter’s is 0.06%—they have vastly different methodologies that serve vastly different portfolio needs.
Vanguard’s income-focused ETF tracks the FTSE High Dividend Yield Index while seeking to provide exposure to U.S. companies that are forecast to pay above-average dividends, offering investors a one-stop shop for diversified access to income-generating equities. Schwab’s counterpart has more selective criteria, which results in a considerably smaller portfolio that focuses on dividend growers.
But the differences don’t stop there.
VYM: Higher Payouts, Slower Growth
The Vanguard High Dividend Yield ETF primarily invests in large-cap U.S. stocks across a range of sectors, with holdings selected for their dividend characteristics rather than through active stock picking.
The top five sectors represented in the fund's portfolio are tech and financials (20% each), healthcare (12%), industrials (11%), and energy (9%).
Correspondingly, the fund’s top holdings include Broadcom (NASDAQ: AVGO), JPMorgan Chase (NYSE: JPM), ExxonMobil (NYSE: XOM), and Johnson & Johnson (NYSE: JNJ). In total, the ETF’s portfolio is made up of more than 600 companies, with its top 25 holdings accounting for 43% of its total weight.
VYM’s dividend currently yields 2.26% quarterly, or $3.63 per share annually at current prices.
It accomplishes that by targeting U.S. companies—excluding REITs—whose dividends are forecast to pay above-average yields, then weighting them largely by market capitalization.
That makes this ETF better suited for investors who want broad, low-cost dividend exposure and less single-stock concentration, rather than investors simply trying to maximize current yield.
SCHD: Lower Payouts, Higher Growth
The Schwab U.S. Dividend Equity ETF has far more stringent selection criteria than Vanguard’s high-dividend fund.
Tracking the Dow Jones U.S. Dividend 100 Index, SCHD’s screening requirements include 10 consecutive years of dividend payments, with filters for cash flow-to-debt, return on equity, indicated yield, and five-year dividend growth rate.
As a result, its highly curated portfolio holds roughly 100 individual stocks with a high turnover rate of nearly 42%. Whereas VYM’s top 25 holdings account for about 78% of its total portfolio, SCHD is far more concentrated, as well. The fund’s top 10 holdings account for nearly 42% of its total portfolio.
Those stricter inclusion rules result in heavier weightings for healthcare (21%), consumer staples (20.5%), and financials (10%)—three sectors historically known for their dividend growers. The fund also has exposure to energy (14%).
Notably, with its focus on dividend growth, the ETF’s basket is far lighter on tech exposure (14%). Texas Instruments (NASDAQ: TXN) is the only tech stock in the fund’s top 10 holdings.
Instead, shareholders receive sizable weightings to Dividend Kings, including Coca-Cola (NYSE: KO), Procter & Gamble (NYSE: PG), PepsiCo (NASDAQ: PEP), and Altria Group (NYSE: MO), as well as a handful of Dividend Champions (companies that have increased their dividends for at least the last 25 consecutive year).
SCHD’s dividend yields 3.23% on a trailing 12-month basis—more than 100 basis points higher than VYM. At current prices, that yield equates to a lower quarterly payout of around 28 cents per share. But for income investors with longer horizons, SCHD can serve as a long-term wealth builder that prioritizes compounding and dividend growth, strict inclusion filters, and inflation outperformance.
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