Exchange Traded Funds: SCHD vs DGRO


DGRO is Blackrock's iShares Core Dividend Growth ETF and SCHD is Charles Schwab's U.S. Dividend Equity ETF. Both pay dividends at a reasonable rate. As of Mid-August 2022, DGRO and SCHD ETFs both constitute 20% of my portfolio. This article is going to compare both ETFs to see if owning both makes sense or one reigns supreme.


First let's take a look at the easy stuff:


SCHD Dividend Yield: 3.20%

DGRO Dividend Yield: 2.20%


SCHD Expense Ratio: .06%

DGRO Expense Ratio: .08%


Positions in SCHD: 104 Companies

Positions in DGRO: 414 Companies




Table of Contents

SCHD Overview

SCHD Holdings

DGRO Overview

DGRO Holdings

Fund Overlap

Past Performance

Passive Income

Conclusion


SCHD Overview

SCHD actively screens potential stocks and attempts to track to the Dow Jones Dividend 100 Index. SCHD screens stocks based on the following criteria:

  • All index eligible stocks must have sustained at least 10 consecutive years of dividend payments

  • Have a minimum float-adjusted market capitalization of $500 million USD

  • They meet minimum liquidity criteria

Once those criteria are met the further screen the results:

  • Cash flow to total debt

  • Return on equity

  • Dividend yield

  • 5-year dividend growth rate

SCHD Holdings

To weight the index, they restrict individual holdings to no more than 4% of the index. Additionally, no sector can be weighted more than 25%. SCHD's top 10 holdings consist of:

Merck Stock, Pepsi Stock, IBM Stock, Coca-Cola stock, Amgen Stock, Pfizer Stock, Cisco Stock, and Texas instrument Stock. SCHD's top 10 holdings represent 38%~ of the total fund.


SCHD ETF Top 10 Holdings
SCHD Top 10 Holdings

DGRO Overview

DGRO actively screens and attempts to track the MorningStar US Dividend Growth Index. The index attempts to identify stocks that have been consistently growing their dividends. They must meet the following additional requirements:

  • They must pay qualified dividends (Great for taxes)

  • Have at least five years of uninterrupted dividend growth

  • Payout ratio less than 75%

Interestingly, the fund states the managers are only required to invest 80% of the fund in these screening requirements. The other 20% can be investing in futures, options, or other money producing instruments.


DGRO Holdings

DGRO's top 10 holdings consist of Apple Stock, Microsoft Stock, Proctor & Gamble Stock, JP Morgan Chase Stock, Johnson and Johnson Stock, Home Depot Stock, Pfizer Stock, Merck Stock, Coca-Cola Stock, Broadcom Stock. DGRO's top 10 holdings represent 24%~ of the total fund.


DGRO ETF Top 10 Holdings
DGRO Top 10 Holdings

Fund Overlap

The following information was determined using the Fund overlap tool on ETFRC.com. This is a great tool to use if you are comparing multiple funds.


Overall, 54% of SCHD's holdings are in DGRO. This doesn't necessarily mean that DGRO would be the go-to ETF since SCHD has a better screening methodology. Below is a list of the Top 25 holdings that overlap in both funds.

SCHD vs DGRO Holding Overlap
SCHD vs DGRO Holding Overlap

This overlap is key to review if any of these holdings are key reasons why you are choosing one fund over the other since they are held by both. You would need to dive deeper to find another reason for choosing one fund over the other. Another, area to consider is unique holdings in each ETF. SCHD is primarily focused on high quality dividend blue chips where DGRO is focused on lower dividend yield companies with more growth. Below are the top 10 unique holdings in each ETF.

Unique holdings in SCHD and DGRO
Top 10 Unique Holdings: SCHD (Left) DGRO (Right)

We can see that DGRO's top 10 focuses on heavy hitters like Apple, Microsoft, Intel, and more. This would most likely lead to greater ETF stock price appreciation compared to SCHD. The tradeoff comes with dividend yield where SCHD is a full percent higher.


Past Performance

Next, we'll take a look at past performance of each fund. I used Portfolio Visualizer to perform the back test. The following information was used:

  • Dates: 2014-2022 (Limited by DGRO inception date)

  • Initial Investment: $10,000

  • Monthly Contribution: $250

  • Dividend Re-investment Program (DRIP) - Enabled

Portfolio 1 is 100% SCHD

Portfolio 2 is 100% DGRO

Portfolio 3 is 100% VOO


Portfolio Returns

The portfolio's have a similar ending balance with SCHD edging out the other two by a half a percent~ in CAGR. SCHD also had a best worst year by half when compared to VOO. If you chose to not reinvest your dividends, like in retirement, VOO would be the ETF with the best performance. Ultimately, SCHD is the best fund if you are choosing to dividend invest for retirement. It has the best overall return with dividends and will provide the highest passive income. The income values are listed below:


Passive Income

SCHD's passive income is 32% larger than DGRO and 53% larger than VOO. This is a significant increase if you're looking for passive income. At $1,000,000 invested you would receive the following annual dividends based on current yield:

  • SCHD - $32,000 annually / $2,660 per month

  • DGRO - $22,000 annually / $1,833 per month

  • VOO - $14,300 annually / $1,191 per month

It's easy to see that SCHD has the superior passive income potential.



Conclusion

WINNER: SCHD


Ultimately, choosing the perfect ETF comes down to your individual investing goals and your current portfolio. Personally, I plan to sell my VOO and DGRO holdings and consolidate into SCHD since the performance metrics are nearly identical and the passive income potential for SCHD is far greater. The final choice will often come down to the individual holdings in each fund. I hold Apple, Microsoft, and Home Depot as individual holdings in my portfolio already. If I didn't have those positions, I would consider a smaller position in DGRO to add these dividend growth stocks to my portfolio.


I hope this gave you a better understanding of how each ETF compares.


Happy Investing!


Disclosure: I have long positions in SCHD, VOO, and DGRO.

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