Dividend ETFs give investors exposure to a wide range of dividend stocks. These funds can generate steady cash flow and are usually less risky than growth ETFs. While dividend ETFs don’t always beat the market, they tend to be less volatile and have more diversified portfolios.

The iShares Core Dividend Growth ETF (NYSEARCA:DGRO) and Schwab US Dividend Equity ETF(NYSEARCA:SCHD) are two of the top dividend ETFs. Wondering which one you should pick up? This guide will explore long-term returns, portfolio allocations, and other details about each of these funds to help you make an informed decision.

Investment Philosophies

Both funds invest in dividend stocks, but they have different approaches. DGRO prioritizes dividend growth stocks. These companies tend to have lower yields than average, but they grow their dividends at a faster rate than most corporations. Furthermore, these types of dividend stocks tend to outperform the ones that SCHD prioritizes.

The Schwab US Dividend Equity ETF prioritizes dividend sustainability. The stocks in this fund have higher yields than average, but many of SCHD’s picks also underperform the S&P 500. It’s a relatively safer fund that comes with less volatility, but you miss out on additional returns during bullish markets.

While SCHD focuses on a dividend’s sustainability, DGRO examines how much the dividend is growing. You’ll find plenty of stocks in SCHD with yields above 3% and dividend growth rates below 5%. Meanwhile, you’ll find plenty of dividend stocks in DGRO that have yields under 1% and annualized dividend growth rates above 10%.

Portfolio Allocations

Both funds put more than half of their total assets into large-cap stocks. SCHD has a higher concentration of mid-cap stocks, but both funds have very few small-cap stocks.

DGRO and SCHD both put most of their assets into the financial sector. DGRO allocates 20.5% of its assets into the sector, while SCHD puts 18.2% of its capital into the sector. Both funds have health care within their top three sectors.

A notable difference that likely explains DGRO’s outperformance is that it places 17.9% of its assets in the tech sector.Meanwhile, SCHD only has an 8.8% stake in the technology sector.

SCHD’s top three holdings are Pfizer (NYSE:PFE), Chevron (NYSE:CVX), and Cisco (NASDAQ:CSCO). These high yielders have consistently underperformed the S&P 500.

DGRO’s top three holdings are JP Morgan (NYSE:JPM), Broadcom (NASDAQ:AVGO), and Exxon Mobil (NYSE:XOM). Two of those stocks have outperformed the S&P 500 over the past five years, especially Broadcom, with its 640% gain over that stretch.

Long-Term Performance

DGRO is the clear winner. It’s up by 19.4% over the past year and has maintained an annualized 11.8% return over the past decade. SCHD has trailed those gains with a 1-year return of 14.7%. It has an annualized 11.4% return over the past decade.

Both funds have low expense ratios. SCHD has a slightly lower 0.06% expense ratio compared to DGRO’s 0.08% expense ratio.  SCHD also has a higher 3.64% 12-month yield compared to DGRO’s 2.26% 12-month yield. 

How Macroeconomic Factors Influence Dividend ETFs

Inflation and interest rate fluctuations are two driving macroeconomic factors that play a big role in dividend ETF prices. Dividend ETFs tend to lose value when interest rates go up. That’s because higher interest rates increase the risk-free rate. Dividend income investors may move away from a 3% yielding dividend ETF if they can get a risk-free 4% APY from a U.S. Treasury. 

While higher interest rates can result in dividend ETFs losing value, interest rate cuts do the opposite. Rate cuts are goodfor the stock market as a whole since those cuts reduce the cost of borrowing money. 

Inflation also plays a role in dividend ETFs. Higher inflation tends to boost equities, including dividend ETFs. However, a higher stock price results in a lower yield if you want to buy additional shares.

Dividend Growth vs. Dividend Income

Most dividend investors focus on growth or income. Dividend growth investing caters to people who want to maximize long-term returns and are comfortable with low yields. The idea is that reliable corporations continue to raise their dividends significantly. By the time dividend growth investors retire, they hope that the yields are better and that their stocks have significantly appreciated.

Dividend income investing is less risky since these stocks are usually less volatile. This strategy focuses on high-yield stocks that offer more stability than most assets. While the dividend payouts don’t grow by much each year, investors value that they start with higher cash flow from the beginning.

Dividend income investing is more suitable for investors who are approaching retirement. On the other hand, dividend growth investing may be the optimal path for younger investors who want growth and cash flow.

Regularly Review Your Portfolio

Any decision you make for your portfolio is based on information that you have right now. However, information and long-term financial goals change, making it necessary to review your portfolio from time to time. An ETF that served you well a decade ago may no longer be the best fit today. 

As people get closer to retirement, they don’t have as much time to recover from market corrections. Wealth accumulation is the main focus of younger investors, but older investors typically shift their focus to wealth preservation. Adjusting your portfolio as your preferences change can lead to a robust financial future.

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