Key Points
The Vanguard Dividend Appreciation ETF's market-cap approach gives it an overweight to tech stocks.
This growth-heavy profile makes the Vanguard ETF a better choice for long-term total return.
However, investors focused on dividend income might prefer the Schwab U.S. Dividend Equity ETF.
The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) is one of the best dividend ETFs investors can own. But there's a reason I'd choose the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) if my goal were building long-term wealth.
It has entirely to do with its portfolio allocation and growth-oriented tilt. That might sound strange for a fund built around dividend-paying stocks. But it's likely to influence the long-term return potential of both of these ETFs.
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Why VIG has the advantage
Both ETFs have portfolios of high-quality dividend stocks. But the Schwab U.S. Dividend Equity ETF looks more like a traditional dividend ETF. It's overweighted in defensive sectors and value stocks. It has a more conservative approach to equity investing and long-term wealth creation.
The Vanguard Dividend Appreciation ETF invests in stocks with 10+ year track records of annual dividend growth. But it's the market cap-weighting methodology that gives it its growth tilt.
Broadcom, Microsoft, and Apple qualify for the fund even though they have yields of less than 1%. But because the fund is cap-weighted, they currently have the three largest allocations in the portfolio with a combined weight of 14%. Tech accounts for 27% of the fund overall.
There's no question that this tech tilt gives it better long-term potential. If you're looking at a shorter holding period of maybe a couple of years, either one of these funds could outperform. Over a long-term time horizon of 10+ years, the odds tilt in the favor of the Vanguard Dividend Appreciation ETF.
If your primary goal is dividend income, the Schwab U.S. Dividend Equity ETF is probably the better choice. For total return, however, I prefer the Vanguard Dividend Appreciation ETF.
David Dierking has positions in Apple, Schwab U.S. Dividend Equity ETF, and Vanguard Dividend Appreciation ETF. The Motley Fool has positions in and recommends Apple, Broadcom, Microsoft, and Vanguard Dividend Appreciation ETF. The Motley Fool has a disclosure policy.