VIG vs. SCHD: A Comprehensive Analysis of Dividend ETFs for 2024 – Is VIG a Strong Alternative?

This report aims to provide a detailed comparison between the Vanguard Dividend Appreciation ETF (VIG) and the Schwab U.S. Dividend Equity ETF (SCHD) as of September 30, 2024. By examining various performance metrics, risk factors, and other relevant characteristics, this report seeks to determine whether VIG is a strong alternative to SCHD for investors. The analysis is based on the most recent data available and includes a thorough examination of returns, expense ratios, dividend yields, risk-adjusted performance, and other critical factors.

Introduction

Performance Metrics

Year-to-Date (YTD) and Annual Returns

As of September 28, 2024, VIG has outperformed SCHD across various time frames. The YTD return for VIG stands at 17.33%, compared to SCHD’s 11.68%. Over a one-year period, VIG has delivered a return of 28.78%, while SCHD has provided a 20.14% return. These figures indicate that VIG has consistently outperformed SCHD in the short term.

Long-Term Performance

When examining long-term performance, VIG continues to show superior results. The 3-year annualized return for VIG is 10.43%, compared to SCHD’s 5.19%. Over a 5-year period, VIG has an annualized return of 12.79%, while SCHD has 10.39%. The 10-year annualized return for VIG is 12.10%, whereas SCHD has a return of 9.31%. These long-term metrics suggest that VIG has been a more robust performer over extended periods.

Expense Ratios

Both VIG and SCHD have an expense ratio of 0.06%, making them cost-effective options for investors. The low expense ratio is a significant advantage for both ETFs, as it minimizes the cost of investment and maximizes net returns.

Dividend Yield and Sharpe Ratio

Dividend Yield

Dividend yield is a crucial factor for income-focused investors. As of the latest data, VIG offers a dividend yield of 1.73%, while SCHD provides a yield of 1.16%. Although SCHD has been noted for its higher historical dividend yield (3.41% in previous years), the current figures indicate that VIG is offering a more attractive yield in 2024.

Sharpe Ratio

The Sharpe ratio measures risk-adjusted returns, providing insight into the performance of an investment relative to its risk. VIG has a Sharpe ratio of 2.94, significantly higher than SCHD’s 1.75. This indicates that VIG has delivered better risk-adjusted returns, making it a more attractive option for risk-averse investors.

Risk Metrics

Maximum and Current Drawdown

Drawdown measures the decline from a peak to a trough, indicating the potential risk of an investment. VIG has a maximum drawdown of -46.81%, while SCHD’s maximum drawdown is -33.37%. Although VIG has a higher maximum drawdown, its current drawdown is only -0.07%, compared to SCHD’s -0.65%. This suggests that VIG has recovered more effectively from its peak losses.

Volatility

Volatility is another critical risk metric. VIG has a volatility of 2.94%, while SCHD has a higher volatility of 3.49%. Lower volatility indicates that VIG is less susceptible to market fluctuations, making it a more stable investment option.

Sector Allocation and Diversification

VIG’s Sector Allocation

VIG focuses on companies with a history of increasing dividends, which often leads to a concentration in sectors like consumer staples, healthcare, and industrials. This focus on dividend growth can provide a more stable income stream and potential for capital appreciation.

SCHD’s Sector Allocation

SCHD tracks the Dow Jones U.S. Dividend 100 Index, emphasizing stocks with sustainable and quality dividends. Approximately 90% of its assets are spread across seven sectors, including financial services, energy, consumer cyclicals, and healthcare. This broad sector allocation provides diversification but may expose investors to sector-specific risks.

Historical Context and Investment Strategy

VIG’s Historical Performance

From January 2012 to August 2024, VIG has shown consistent performance, with a compound annual return of 12.10%. Its focus on dividend growth stocks has provided a stable and growing income stream, making it an attractive option for long-term investors.

SCHD’s Historical Performance

SCHD has also performed well historically, with a compound annual return of 13.12% from January 2012 to August 2024. Its emphasis on high-quality, dividend-paying stocks has resulted in substantial returns and a healthy dividend yield. However, its higher volatility and lower Sharpe ratio compared to VIG may be a concern for risk-averse investors.

Conclusion

Based on the analysis of various performance metrics, risk factors, and other relevant characteristics, VIG appears to be a strong alternative to SCHD. VIG has consistently outperformed SCHD in terms of returns across multiple time frames, offers a higher dividend yield, and provides better risk-adjusted performance as indicated by its higher Sharpe ratio. Although SCHD has its merits, including a broad sector allocation and a historically higher dividend yield, VIG’s superior performance and stability make it a more attractive option for investors seeking long-term growth and income.

In conclusion, VIG is a robust alternative to SCHD, offering better returns, lower volatility, and higher risk-adjusted performance. Investors looking for a reliable dividend-focused ETF should consider VIG as a viable option in their investment portfolio.