SCHD vs. VYM: Which High-Yield ETF Should You Own?

The interest in fixed income has surged as long-term bond yields climb above the 5% mark. This trend is prompting investors to reconsider their choices between traditional dividend stock ETFs and high-yield equity ETFs. Two notable contenders in this space are the Schwab U.S. Dividend Equity ETF (SCHD) and the Vanguard High Dividend Yield ETF (VYM).

At present, SCHD is leading the pack, delivering a year-to-date gain that surpasses VYM by over 12%. However, the primary reason for my preference for SCHD lies in its unique stock selection methodology. SCHD evaluates a company based on several fundamental balance-sheet strength metrics, its historical dividend growth rate, and its yield. This comprehensive approach enables the fund to offer a robust 3.3% dividend yield.

In contrast, VYM selects stocks purely based on yield. It begins with a broad U.S. equity universe and invests in the top half of yields within that group. However, it does not take into account the quality of dividend growth during this process. Consequently, VYM's dividend yield is considerably lower at 2.4%.

When considering portfolio composition, the differences between the two ETFs become even more pronounced. VYM has a higher allocation to sectors like financials, utilities, and tech, which are known to be sensitive to interest rate fluctuations. On the other hand, SCHD is more heavily weighted towards consumer staples and healthcare sectors, which are typically viewed as more defensive and resilient during economic downturns.

Given these factors - a higher yield, a proven track record, and a portfolio that is better suited to current macroeconomic conditions - SCHD emerges as the preferred dividend ETF for investment.