Comparing Popular Dividend ETFs: SCHD vs HDV
Dividend ETFs are a popular investment option that focus on investing in stocks that pay dividends. These types of ETFs typically include established and profitable companies with a track record of consistent or growing dividends over time. Dividend ETFs can provide investors with a source of income, diversification, stability, and potential for capital appreciation. However, investors should be aware of the potential risks of these types of ETFs, such as higher risk, limited growth potential, concentration risk, interest rate risk, and tax implications.
In this blog post, we will compare two popular dividend ETFs, Schwab U.S. Dividend Equity ETF (SCHD) and iShares High Dividend ETF (HDV). We will examine their similarities and differences, as well as provide a comparison of their top 10 holdings.
By the end of this post, investors will have a better understanding of whether these ETFs align with their investment goals and risk tolerance.
What are Dividend ETFs?
Dividend ETFs are exchange-traded funds (ETFs) that invest in stocks that pay dividends. Dividends are payments made by companies to their shareholders as a portion of their earnings. Typically, companies that pay dividends are established and profitable, and may have a track record of steady or growing dividends over time.
Dividend ETFs may focus on different types of dividend-paying stocks. Some ETFs may focus on high dividend yield stocks, which are stocks that pay a relatively high dividend compared to their stock price. Other ETFs may focus on stocks with a consistent history of paying and growing dividends, or on stocks with a combination of high yield and dividend growth potential.
Benefits of Investing in High Yield Stock ETFs
Dividend ETFs may offer several potential benefits to investors, including providing a source of income, stability, and diversification. However, investors should also be aware of the potential risks of dividend ETFs, such as concentration risk, interest rate risk, and the risk of investing in companies that may prioritize dividend payments over reinvesting in the business. As with any investment, it’s important for investors to carefully evaluate the potential risks and rewards of dividend ETFs and to consider their overall investment goals and risk tolerance before deciding.
Benefits of High Dividend ETFs
Investing in high yield stock ETFs may offer several benefits to investors, including:
Income: High yield stock ETFs can provide a source of income for investors, as they typically hold stocks that pay higher-than-average dividends. This can be especially beneficial for investors who are seeking a steady stream of income in retirement or who want to supplement their other sources of income.
Diversification: Investing in a high yield stock ETF can provide investors with exposure to a diverse portfolio of stocks that pay high dividends. This can help to reduce portfolio risk and volatility, as well as provide exposure to a variety of industries and sectors.
Stability: Stocks that pay high dividends tend to be more stable than those that don’t, as they are often from established, mature companies with stable cash flows. This can provide investors with a level of stability and predictability in their investment returns.
Potential for capital appreciation: Although high yield stock ETFs focus on income, they can also provide potential for capital appreciation over the long term. This is because the underlying stocks in the ETF may grow in value over time, leading to capital gains for investors.
Cost-effectiveness: Investing in a high yield stock ETF can be a cost-effective way to gain exposure to a diversified portfolio of high yield stocks. ETFs generally have lower expense ratios than actively managed funds, which can help to keep investment costs low.
Downsides of high dividend ETFs
While high dividend ETFs can offer several benefits, there are also some potential downsides to consider. Here are a few:
Higher risk: Companies that pay high dividends may be more susceptible to economic or financial challenges, such as declining earnings or increased debt. This can increase the risk of the underlying stocks in the ETF, which can in turn increase the risk of the ETF itself.
Limited growth potential: Companies that pay high dividends may prioritize distributing cash to shareholders over reinvesting in the business, which can limit their growth potential. This can lead to lower long-term returns compared to companies that reinvest more of their earnings.
Concentration risk: High dividend ETFs may be heavily concentrated in certain sectors or industries, which can increase the risk of the portfolio if those sectors or industries underperform. Additionally, high dividend ETFs may be heavily weighted toward a few large-cap stocks, which can increase concentration risk.
Interest rate risk: High dividend ETFs may be sensitive to changes in interest rates. When interest rates rise, investors may be less willing to pay a premium for dividend-paying stocks, which can lead to lower stock prices and lower returns for investors.
Tax implications: High dividend ETFs may generate significant taxable income for investors, which can have tax implications. For example, qualified dividends may be subject to a lower tax rate than ordinary income, but non-qualified dividends may be subject to the same tax rate as ordinary income.
SCHD vs HDV
Schwab U.S. Dividend Equity ETF (SCHD): This ETF aims to track the performance of the Dow Jones U.S. Dividend 100 Index, which consists of high dividend yielding U.S. stocks. The fund has an expense ratio of 0.06% and holds over 100 stocks. The current dividend yield of the fund is around 3.57% in March 2023.
iShares High Dividend ETF (HDV): This ETF aims to track the performance of the Morningstar Dividend Yield Focus Index, which consists of U.S. stocks that have a history of paying dividends and are expected to continue doing so in the future. The fund has an expense ratio of 0.08% and holds over 70 stocks. The current dividend yield of the fund is around 3.69% in March 2023.
SCHD vs HDV Similarities
In terms of similarities, both ETFs focus on high dividend yielding U.S. stocks and have a similar number of holdings. They also have relatively low expense ratios, although SCHD has a significantly lower expense ratio.
SCHD vs HDV Differences
However, there are also some differences between the two ETFs. SCHD tracks a different index than HDV, which may result in different performance and holdings. Additionally, HDV has a higher dividend yield than SCHD, although this is partially offset by its slightly higher expense ratio. Finally, HDV has a higher turnover rate than SCHD, which may lead to higher transaction costs and taxes.
Overall, both ETFs may be appropriate for investors seeking exposure to high dividend yielding U.S. stocks, but SCHD may be more cost-effective for investors due to its lower expense ratio. HDV may be more suitable for investors seeking a higher dividend yield.
Comparison of Holdings:
| Company | SCHD Top 10 Holdings Weight (%) | HDV Top 10 Holdings Weight (%) |
| Broadcom Inc. | 5.05 | 4.83 |
| Exxon Mobil Corporation | N/A | 9.7 |
| Cisco Systems, Inc. | 4.27 | 3.87 |
| Texas Instruments Incorporated | 4.2 | N/A |
| Verizon Communications Inc. | 4.14 | 6.55 |
| Merck & Co., Inc. | 4.11 | 4.15 |
| Lockheed Martin Corporation | 4.11 | N/A |
| PepsiCo, Inc. | 3.97 | N/A |
| Coca-Cola Company | 3.94 | 3.89 |
| Home Depot, Inc. | 3.79 | N/A |
| AbbVie, Inc. | N/A | 5.4 |
| Chevron Corporation | N/A | 5.78 |
| Philip Morris International Inc. | N/A | 4.65 |
| Pfizer Inc. | N/A | 4.28 |
| IBM | 3.61 | N/A |