Two dividend ETFs, different selection rules
SCHD vs VYM
Both are widely held dividend ETFs, and they are often treated as interchangeable. They are not. They screen for different things, and a decade of contributions shows how much that selection rule is worth.
#What this plan actually returned
These are real results, not estimates. We ran $10,000 up front plus $500 a month from September 9, 2016 to September 9, 2026 (10.0 years), with dividends reinvested, against actual daily closing prices for each fund.
| Ticker | Invested | Final value | Total return | Ann. return | Worst drop |
|---|---|---|---|---|---|
| SCHD | $70,000 | $151,979 | +117.11% | +13.12% | -33.37% |
| VYM | $70,000 | $145,991 | +108.56% | +12.46% | -35.21% |
Ann. return is the internal rate of return (IRR), which accounts for how long each individual contribution was invested, so it is lower than the headline total return on a plan that kept adding money. Worst drop is the deepest peak-to-trough decline in the fund itself during this window, measured on daily closes.
Figures current as of . Results change as markets move.
Pre-tax and excluding brokerage commissions. See How It Works for the full methodology, or re-run this exact comparison with your own numbers.
#Reading the result
SCHD finished ahead, but by a margin that deserves context: roughly $7,000 on $70,000 of contributions, or about three quarters of a percentage point of annualized return. Compared with the gaps you see between, say, a broad-market fund and a concentrated growth fund, this is a narrow result. Two funds screening the same universe for the same broad characteristic ended up in a similar place, which is roughly what you would expect.
The more useful takeaway is that neither fund did what the pitch for dividend investing often implies. Both had drawdowns in the mid-thirties during the 2020 crash, comparable to the broad market. A dividend screen is a style tilt, not a downside hedge.
#The selection rules are the whole story
SCHD (Schwab US Dividend Equity ETF) tracks an index that starts by requiring ten consecutive years of dividend payments, then ranks the survivors on fundamental quality measures including cash flow to total debt, return on equity, dividend yield, and five-year dividend growth. It ends up holding roughly 100 stocks. The screen is explicitly a quality filter that uses dividends as the entry ticket rather than the goal.
VYM (Vanguard High Dividend Yield ETF) takes a simpler approach: rank US stocks by forecast dividend yield and hold the higher-yielding half, weighted by market capitalization. That produces a much broader portfolio, several hundred names, with no quality screen applied on top of the yield ranking.
#Where a yield-only screen can go wrong
Ranking purely by yield has a known failure mode. A stock’s dividend yield is the dividend divided by the price, so a yield can rise for two opposite reasons: the company raised its dividend, or the share price fell. A screen that does not distinguish between those will systematically pick up companies in trouble, sometimes shortly before a dividend cut.
This is what SCHD’s quality overlay is designed to filter out, and it is the most plausible explanation for the modest performance gap in the table above. It is also why the gap is modest rather than dramatic: over a decade with only one severe market dislocation, the screen did not get tested as hard as it might be in a period with more widespread dividend cuts.
#Why reinvestment matters more here than elsewhere
For funds whose returns come substantially from income rather than price appreciation, the decision to reinvest dividends is not a rounding error. This backtest reinvests them for both funds. Each reinvested distribution buys additional shares, which produce their own distributions in the next cycle, and the effect compounds over the full period.
Run the same comparison with dividend reinvestment turned off and both results fall noticeably further than they would for a low-yield growth fund. If you want the mechanism in detail, see what dividend reinvestment is really worth over 10+ years.
#What to test
- Toggle dividend reinvestment off and compare how far each result falls. This is the single most informative change for income-oriented funds.
- Add VTI or VOO as a third ticker. The question most dividend investors actually want answered is whether the tilt beat the plain broad market, not which dividend fund won.
- Run a window that includes 2020 and check the drawdown column against a broad-market fund. Dividend funds are frequently described as defensive; test that claim rather than accepting it.
- Compare across different starting years. A narrow gap like this one can reverse depending on where the window begins.
Change the contribution amount, schedule, or date range and re-run this comparison against the same historical data.
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