How the Vanguard High Dividend Yield ETF Stacks Up Against These 2 Popular ETFs

As the name of the Vanguard High Dividend Yield ETF (VYM 0.01%) says, it is a dividend-centric exchange-traded fund (ETF). That puts it up against a long list of alternatives, with two of the most prominent being the SPDR Portfolio S&P 500 High Dividend Yield ETF (SPYD -0.71%) and the Schwab U.S. Dividend Equity ETF (SCHD -0.80%). How does the Vanguard ETF stack up? It depends on what you are looking for.

Dividend yields first

The Achilles’ heel of the Vanguard High Dividend Yield ETF is its yield. At roughly 2.6%, it is well above the S&P 500 index’s scant 1.2%. But it is far below the nearly 3.9% yield offered by the Schwab U.S. Dividend Equity ETF, and the 4.5% of the SPDR Portfolio S&P 500 High Dividend Yield ETF.

If all you care about is yield, the SPDR ETF wins. But that is a very narrow way to look at what are three very different dividend-focused investments. A deeper understanding of what each of these exchange-traded funds do is needed to make a final decision.

Simple and complex dividend approaches

The Vanguard ETF is probably the simplest of the trio. It starts by taking all of the dividend paying stocks on the U.S. market. Then it selects the highest-yielding 50% of the list. The stocks are market-cap weighted, so the largest companies have the biggest impact on performance.

The most important takeaway from this approach is that the portfolio is huge, with over 550 stocks. That’s a lot of diversification, which could make this ETF a worthy alternative to an S&P 500 index fund. The expense ratio is a tiny 0.06%.

One step up on complexity is the SPDR ETF. Its starting points are the stocks within the S&P 500 index. That’s a group of 500 or so companies selected by a committee because they are large and economically important.

This adds a little bit of selectivity to the process of creating the ETF’s portfolio. But the overall logic is still pretty simple. The SPDR ETF owns just the 80 highest-yielding stocks in the S&P 500.

They are equally weighted, which helps reduce risk. This is important because buying the highest-yielding stocks will often mean buying companies that are struggling for some reason. The expense ratio is a low 0.07%.

The Schwab ETF is by far the most complex choice. It starts by looking at companies that have increased dividends for at least 10 years. Then it creates a composite score using the ratio of cash flow to total debt, the return on equity, the dividend yield, and a company’s five-year dividend growth rate.

The 100 companies with the highest composite scores get into the ETF with a market-cap weighting. The expense ratio is a tiny 0.06%. What’s unique here is that the Schwab ETF is pretty much doing what dividend investors would if they were picking stocks individually.

The winner isn’t clear-cut

If you are looking for a diversified portfolio of dividend stocks, the clear winner is the Vanguard High Dividend Yield ETF. As noted, the portfolio is so large that you could consider this ETF as a replacement for the S&P 500 index.

But having so many holdings means it goes pretty far down the yield spectrum, which has the effect of lowering the overall yield relative to other alternatives. That will limit the ETF’s appeal for a lot of dividend investors.

The relatively high yield from the SPDR Portfolio S&P 500 High Dividend Yield ETF could make it the winner for some income lovers. But it has the smallest portfolio and will inherently include some of the riskiest dividend stocks. That probably won’t appeal to more-conservative investors.

Which brings in the Schwab U.S. Dividend Equity ETF, which hits an interesting middle ground. It has an attractive yield and is highly selective, attempting to buy well-run companies that are growing and that have high yields.

The Vanguard fund isn’t a bad ETF, but if you are a dividend investor, you have other options that may be more attractive. Unless, of course, your primary goal is diversification.