Comparing these ETFs is mostly about assessing the potential of dividend growth versus a high-yield strategy.
The Vanguard ETF’s methodology currently emphasizes tech at the top (for better or worse), while Schwab’s looks for durable companies with healthy balance sheets.
I’ve always liked Schwab’s strategy, which considers dividend growth history, yield, and balance sheet quality.
Dividend income investing usually isn’t as simple as just picking the best dividend stocks. Your personal goals and income requirements can have a big impact on whether you focus on dividend growth or high yield.
Dividend growth stocks tend to have greater durability and sustainability, but can come with low yields. High yield stocks can help solve the income problem, but they can also turn into yield traps that damage total returns. That makes the argument between the Vanguard Dividend Appreciation ETF(NYSEMKT: VIG) and the Schwab U.S. Dividend Equity ETF(NYSEMKT: SCHD) an interesting one.
Is the current market environment built more for classic dividend growth or one that focuses on high yield with a quality tilt?
Image source: Getty Images.
The Vanguard Dividend Appreciation ETF tracks the S&P U.S. Dividend Growers Index. It targets large-cap stocks that have grown their annual dividend for at least 10 consecutive years. It eliminates the top 25% of yields in order to avoid some of those potential yield traps and weights the final portfolio by market cap.
There’s good and bad in this strategy. On the plus side, the elimination of high-yielders makes this more of a pure dividend growth play, even if it comes at the expense of income. On the downside, the market cap-weighting gives preference to the biggest companies regardless of yield or dividend history.
The Schwab U.S. Dividend Equity ETF follows the Dow Jones U.S. Dividend 100 Index. It targets companies of all sizes that have paid (but not necessarily grown) dividends over the past decade and scores them using metrics such as return on equity (ROE), cash flow to debt, dividend growth rate, and yield. The 100 stocks with the best combination of these factors make the final cut.
This methodology produces a portfolio heavily tilted toward the yield factor, but filled with higher-quality stocks. This is, in my opinion, an advantageous way of building the portfolio. Selecting purely by yield can be dangerous because it gives no consideration to sustainability. By selecting stocks only backed by quality balance sheets helps address that problem.
The Vanguard Dividend Appreciation ETF has benefited from its market-cap-weighting strategy because it’s made Broadcom, Microsoft, and Apple its top three holdings. That’s helped past performance relative to other dividend ETFs, but what happens if the market keeps rotating away from tech as it’s begun to do in 2026?
The Schwab U.S. Dividend Equity ETF has lagged mightily over the past three years, but that’s a function of its strategy being out of favor, not the strategy itself. Overall, I really like that it incorporates dividend growth history, dividend quality, and high yield into its strategy. That really helps it identify a portfolio of top-tier stocks.
I believe that the Schwab ETF is the better buy right now. With questions surrounding the direction of the economy, the health of the labor market, and the geopolitical backdrop, we could see a continuation of the current rotation away from tech and into more defensive issues. Its portfolio is much better positioned for that type of scenario.
Before you buy stock in Vanguard Dividend Appreciation ETF, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Vanguard Dividend Appreciation ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004… if you invested $1,000 at the time of our recommendation, you’d have $474,578!* Or when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $1,141,628!*
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David Dierking has positions in Apple and Vanguard Dividend Appreciation ETF. The Motley Fool has positions in and recommends Apple, Microsoft, and Vanguard Dividend Appreciation ETF. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Jack Bogle, known as the father of index investing, founded Vanguard in 1975 to introduce low-cost investment products to the masses. He succeeded with this mission. With $11.9 trillion in assets under management (as of Oct. 31), the firm offers numerous exchange-traded funds (ETFs) these days.
This gives investors plenty of choices when deciding where to park their hard-earned savings. One of these investment vehicles stands out, though. Here’s what I believe is the best Vanguard ETF to invest $1,000 in right now.
Image source: Getty Images.
The S&P 500(SNPINDEX: ^GSPC) is the most closely watched stock market benchmark. It contains 500 or so large and profitable businesses listed on stock exchanges in the U.S., representing about 80% of domestic market capitalization.
To invest behind this, you should consider the Vanguard S&P 500 ETF(NYSEMKT: VOO). It has $1.5 trillion in assets, making it an extremely popular option for investors.
This ETF tracks the performance of the S&P 500, matching its composition. It gives investors exposure to every sector, from information technology and financials to consumer discretionary and energy. Investors are basically betting on the ongoing ingenuity, inventiveness, and success of the American economy. Historically, it’s been a very smart idea to adopt this perspective.
While there are hundreds of companies in this ETF, investors must understand that there is greater exposure to the largest businesses. It’s no surprise that with technology enterprises dominating in recent times, the Vanguard S&P 500 ETF has high concentration to names like Nvidia, Apple, and Microsoft, for instance, which combined make up 21% of the portfolio.
The beauty of owning this ETF is that it gives investors a hassle-free method to allocate capital to the stock market. You don’t need a degree in finance, expert analytical skills, or hours of free time each week to conduct research. This makes it an extremely compelling choice for passive investors.
The Vanguard S&P 500 ETF’s performance is probably the single most important data point investors are interested in. In the past decade, it has produced a total return of 300% (as of Dec. 29). A hypothetical $1,000 investment made in late December 2015 would be worth $4,000 today. No one should have any complaints about this kind of result.
Even better, the costs are extremely low. The ETF carries an expense ratio of just 0.03%. Only $0.30 of that $1,000 gets paid to Vanguard.
It’s impossible to overstate how valuable low fees are in the investment management industry. There are so many active fund managers who charge their clients exorbitant fees, but they still fail to outperform the S&P 500 over long time horizons. With the Vanguard S&P 500 ETF, investors can match the index’s performance without losing an arm and a leg.
It would be wonderful if this ETF generated a similar gain over the next 10 years. However, the truth is that no one has any idea what the future will hold.
On the one hand, the bears will point to the S&P 500’s current CAPE ratio of 40.7, a historically high level. An elevated starting valuation typically doesn’t bode well for returns going forward.
On the other hand, it’s easy to remain optimistic. The valuations of some of the most dominant companies aren’t too stretched when compared to their earnings. Fiscal and monetary policy have been accommodating to asset prices. And capital has flooded the market from passive investors, adding more buying power. I believe these factors hold more weight.
These are the variables to keep in mind, although investors would be better served not wasting time trying to predict what will happen. Instead, it’s critical to maintain a long-term mindset, thinking about the next decade and beyond and not the next few months. With that perspective, it makes sense that the Vanguard S&P 500 ETF is a top choice to invest $1,000 in right now.
Before you buy stock in Vanguard S&P 500 ETF, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Vanguard S&P 500 ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004… if you invested $1,000 at the time of our recommendation, you’d have $505,641!* Or when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $1,143,283!*
Now, it’s worth noting Stock Advisor’s total average return is 974% — a market-crushing outperformance compared to 193% for the S&P 500. Don’t miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.
Neil Patel has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Apple, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.