SCHD vs VYM: A Value Investor's Check on Quality and Compounding

For the value investor, the choice between two dividend ETFs is not merely a matter of picking a ticker. It is a test of investment philosophy. At its core, the debate between Schwab's SCHD and Vanguard's VYM comes down to a fundamental question: are we chasing a high current yield, or are we building a portfolio of durable businesses that can compound value over decades?

SCHD is built on the Dow Jones U.S. Dividend 100 Index, a framework that explicitly prioritizes quality and growth. The index selects companies based on a track record of dividend growth and financial strength, not just the size of their current payout. This is the classic value approach: identifying businesses with wide moats that can consistently reinvest earnings to grow their dividends and, by extension, their intrinsic value. The holdings reflect this-companies like Lockheed Martin, AbbVie, and Cisco that have demonstrated the ability to pay and increase dividends through market cycles.

VYM, by contrast, tracks the FTSE Custom High Dividend Yield Index. Its mandate is simpler and more direct: find the stocks with the highest current yield. This strategy can be effective in the short term, but it carries a well-known risk. As Joe Alger of Crestwood Advisors notes, a high yield can be a deceivingly attractive dividend yield, representing a potential value trap. A company with deteriorating fundamentals and a declining share price can have a high yield, but that yield is often unsustainable. The trade-off, as noted by Invesco's Rene Reyna, can be a potential for NAV erosion, where distributions are funded by a return of capital rather than earnings.

Both ETFs share the same low-cost platform, with identical expense ratios of 0.06%. This removes price as a differentiator, forcing a focus on the underlying strategy. For the long-term investor, the quality-focused, dividend-growth model of SCHD offers a more durable path to compounding. It seeks to own businesses that are not just paying dividends today, but are positioned to pay higher ones tomorrow. VYM's pure yield chase, while potentially generating more cash flow upfront, exposes the portfolio to the volatility and risk of companies that may be struggling to maintain their payouts. In the patient pursuit of capital appreciation through business growth, the philosophical divide is clear.

Performance and Risk: The Quality Compounding Engine

When evaluating a strategy for capital appreciation, the historical record provides the clearest test. Over the past decade, SCHD's total return of 12.30% annualized from inception has decisively outpaced the 10.74% annualized return of its large value category benchmark. This performance gap is not a fleeting anomaly but a consistent feature of the fund's quality-focused approach. The Dow Jones U.S. Dividend 100 Index, which SCHD tracks, is explicitly designed to select companies with strong financials and a history of dividend growth. This framework has delivered a compounding engine that has worked over full market cycles.

In contrast, VYM's pure yield strategy shows a different risk and factor profile. While it may function as a value tilt in disguise, its exposure is not to the quality factor that drives durable business growth. As noted in a factor analysis, VYM's screen for high yield introduces an implicit value tilt, but it lacks the explicit quality and growth criteria embedded in SCHD's index. For the value investor seeking to compound capital through businesses with wide moats, SCHD's quality tilt is more directly aligned with the long-term compounding engine. The strategy is not about chasing the highest current yield, but about building a portfolio of companies that are structurally positioned to grow their intrinsic value and, consequently, their dividends over decades.

Beyond the factor exposure, the sheer scale of these ETFs matters for execution. SCHD commands a massive $72 billion in assets, with an average daily volume of 17.8 million shares. This provides superior liquidity and ensures tight bid-ask spreads, which is crucial for large investors. VYM, while also large, has a smaller footprint of $69.5 billion in assets and a daily volume that is an order of magnitude lower. For the disciplined investor, the liquidity advantage of SCHD reduces friction and cost, allowing the strategy to be implemented efficiently without moving the market.

The bottom line is that SCHD's historical performance, its alignment with the quality factor, and its operational scale create a more robust platform for the patient investor. It offers a proven track record of outperforming its benchmark, a strategy built for durable compounding, and the liquidity to execute it. VYM's approach, while potentially effective as a value proxy, does not provide the same integrated engine for capital appreciation through quality businesses.

Portfolio Exposure: The Moat Check

For the value investor, the ultimate test of a strategy is the quality of the businesses it owns. The portfolio composition reveals which ETF is built on durable competitive advantages and which leans into cyclical vulnerability. Here, the difference is stark.

SCHD's portfolio is explicitly constructed for quality. Its 16.28% exposure to Health Technology is a key strength. This sector, driven by innovation cycles in pharmaceuticals and medical devices, often features companies with wide moats and pricing power. In contrast, VYM's 21.24% exposure to Finance is more cyclical. Financials are sensitive to interest rates and economic downturns, making their earnings and dividends less predictable over long cycles. This sector tilt alone suggests SCHD is positioned for more stable compounding.

The holdings themselves cement this moat check. SCHD's largest holding is Broadcom at 8.68%. Broadcom operates in semiconductors and software, businesses with significant barriers to entry and recurring revenue streams. Its wide moat is a cornerstone of the fund's quality thesis. VYM's top holding, Merck at 4.17%, is a leading pharmaceutical company, but it operates in a more regulated and patent-dependent environment. While also a quality business, its growth path is more linear and subject to external pressures than Broadcom's diversified tech platform.

The recent market rotation back toward dividend stocks in early 2026 provides a potential catalyst for SCHD's quality strategy. As investors seek stability amid economic uncertainty, the focus is shifting from pure yield to dividend sustainability. This environment favors SCHD's framework, which screens for dividend health and financial strength. The fund's selection process, which incorporates dividend growth, dividend quality, and high yield, is designed to identify companies that can pay and increase dividends through cycles. In this setup, SCHD's portfolio of durable businesses is better positioned to re-rate and deliver superior long-term returns.

The Value Investor's Verdict: Metrics and Catalysts

For the disciplined investor, the forward view must be anchored in specific metrics that validate the quality thesis and identify real catalysts. The choice between SCHD and VYM is not just about past performance, but about monitoring for the risks that can erode capital over time.

The primary risk for VYM, and for any high-yield strategy, is NAV erosion. As experts caution, high-dividend products can be a potential value trap, where the yield is not supported by sustainable earnings. This risk materializes when a fund's distributions are funded by a return of capital, which eats into the net asset value. A value investor must watch for this red flag, as it undermines the very compounding engine the investor seeks. The fund's concentration in high-yield, potentially lower-quality companies makes it vulnerable to dividend cuts during economic stress, a classic sign of deteriorating fundamentals.

To avoid these yield traps, a value investor must prioritize holdings with a proven history of dividend growth, not just high current yield. As Joe Alger notes, companies with high dividend yields but deteriorating fundamentals are less likely to be growing their dividend at high rates. This is the core of the quality check. For SCHD, the framework is built to screen for this: dividend growth, dividend quality, and yield are all part of the selection process. The investor should monitor whether the fund's top holdings continue to demonstrate this growth trajectory, as that is the best indicator of a durable competitive moat.

The catalyst for SCHD's quality strategy is a market rotation toward dividend sustainability. As economic uncertainty persists, the focus is shifting from pure yield to the ability to pay and increase dividends through cycles. This environment favors the fund's explicit quality tilt. The catalyst is not a single event, but a sustained re-rating of quality stocks, which SCHD is built to capture. For VYM, the catalyst is more elusive and tied to the sustainability of its high-yield holdings, which are inherently more vulnerable to market cycles and interest rate fluctuations.

In the end, the value investor's framework is clear. Monitor for NAV erosion as a sign of unsustainable distributions. Recognize that VYM's primary risk is its concentration in companies that may cut dividends under stress. And above all, prioritize holdings with a history of dividend growth to avoid the deceptive allure of a high yield that masks a deteriorating business. The patient investor compounds capital by owning businesses that can grow their dividends, not by chasing the highest current payout.