Two 2-ETF Combos For A Winning Dividend Portfolio
In which I examine pairing SCHD with either VIG or DGRO, and come to some surprising conclusions.
In a recent article for Seeking Alpha, I compared iShares Core Dividend Growth ETF (DGRO) and Vanguard Dividend Appreciation ETF (VIG), with the goal of picking a winner for 2023. While I decided the two were very closely matched, I gave the nod to DGRO as my choice for 2023.
In the comments section of the article, a reader submitted this question:
What is your opinion of equal-weighting DGRO and SCHD as the stock dividend portion of my portfolio?
I thought that was a most interesting question. At the present time, Schwab U.S. Dividend Equity ETF (SCHD) is considered by many to be the “holy grail” of dividend ETFs, the one ETF you must include in your portfolio if dividend investing is of any interest to you. At the same time, SCHD focuses a little more on higher current dividends, whereas both DGRO and VIG focus more on dividend growth.
So the question of how they might be profitably paired intrigued me. After all, in DGRO and VIG, you benefit from two of the best filtering criteria in the industry when it comes to dividend growth, and in SCHD you benefit from possibly the best criteria anywhere when it comes to high dividends, and possibly even dividends, period.
And so I did a little research, and provided an answer to my reader. In so doing, I had an idea for this article, in which I will share with you the process, and the tools, I used to do so.
Portfolio Overlap and ETFRC.COM
The first thing I considered was the question of portfolio overlap. You see, more ETFs does not necessarily mean more diversification. If you choose 2 ETFs and both contain the same stocks, or very close to it, you haven’t really achieved much in terms of diversification.
Happily, there is a wonderful website, etfrc.com, where you can check the holdings of two ETFs against each other to determine how much overlap is present.
So, for example, if you were to run a comparison of DGRO and VIG today, you would find a lot of overlap. Etfrc.com calculates 69% overlap in the two funds’ weighted holdings, with 60.0% of DGRO’s 445 holdings in VIG, and 84.7% of VIG’s 318 holdings also in DGRO. In other words, you can choose to own both DGRO and VIG and you will get some diversification, but not as much as you could get with a different choice.
What, though, if we combine SCHD with either DGRO or VIG? To do this, I will share two graphics in each case, for your consideration. Let’s take a look.
SCHD & DGRO
First of all, here is what I will call the “overview” graphic, the one from which I gave you the values for DGRO and VIG above.
In the case of SCHD and DGRO, we find that things are much better. The overlap by weight has dropped to 27%. Looking just a little further, we find that a mere 10.6% of DGRO’s 445 holdings are also present in SCHD. Additionally, you will notice some nice differences in certain sector weightings. The most extreme example is that DGRO contains a significantly higher weighting in Utilities but significantly less in Consumer Staples.
Next, a very helpful “detail” screen, showing holdings that are significantly different (non-overlapping) between the two ETFs being compared.
In this case, then, you see that SCHD features high-dividend payers, such as Verizon Communications and Texas Instruments that are most likely not at all present in DGRO, due to their different filtering criteria.
SCHD & VIG
With that background explanation, let’s now take a look at SCHD and VIG. First, the overview.
As can quickly be seen, the amount of overlap for SCHD and VIG is even less than for SCHD and DGRO. Further, you will notice a striking difference in the Technology sector between these two funds, with VIG holding a substantial weighting here and SCHD much less so.
Next, the detail screen.
Look at VIG’s roughly 9.4% combined weighting in Microsoft and Apple. There’s the bulk of the weighting difference in Technology.
Portfolio Backtesting and PortfolioVisualizer.COM
From all of the above, my intuitive sense was that, even though I had declared DGRO as my overall dividend-growth pick for 2023, VIG might be the preferred ETF to pair with SCHD, should one wish to do so.
To see whether that is the case or not, I turned to another website, portfoliovisualizer.com, where we can run historical backtests to see how given ETFs, and even combinations of ETFs, have performed.
Using this tool, I quickly set up 3 portfolios. Portfolio 1 is comprised of 100% DGRO. Portfolio 2 is a 50/50 mix of SCHD and DGRO, and Portfolio 3 is a 50/50 mix of SCHD and VIG.
I was able to perform this test as far back as 2015, constrained by the inception date of DGRO. Here are the results. (Here’s a handy link if you want to check for yourself.)
The backtest contained, for me, several surprises. First of all, I would have thought that SCHD, with its bias towards higher dividend payers, would have had a lower total return. And yet, the portfolio of 100% SCHD had the highest total return over this period. Can you perhaps see why this ETF is held in such high regard?
The second surprise was that the 50/50 mix with either of the other two ETFs produced almost identical results. I might point out that the SCHD/VIG combo managed to eke out very slightly superior Sharpe and Sortino ratios, due to its slightly lower standard deviation.
Lastly, though, I would like to point out one more thing in the present environment. You see, each of these ETFs get their portfolios reconstituted each year. What that means is that their respective filters are run, and certain stocks are either removed from, or added to, the portfolio.
As it happens, 2023 happens that be the first time in a long time that SCHD has actually underperformed a little bit. Have a look at how the 3 portfolios have performed year-to-date in 2023.
Related to this, VIG recently experienced a somewhat significant change. Specifically, Apple, Inc. recently met VIG’s most well-known filter; that only companies that have raised their dividends for 10 consecutive years are allowed into the fund. As a result, Apple was not present in VIG for most of that longer backtest, but it is now.
Summary and Conclusion
I hope this article has been both interesting and helpful. Here are my two quick takeaways.
It appears that, right this minute, pairing VIG with SCHD could be a winning combination. With the inclusion of AAPL, VIG’s higher weighting in Technology may offer potential for growth, balanced by the higher income level available from SCHD. Further, as featured, the diversification benefits are greater than in the DGRO/SCHD combination.
All that aside, over time, SCHD has established an enviable track record. If you have any interest at all in dividend-focused investing, you should have this ETF in your portfolio, as I do. It may well be that SCHD’s brief period of underperformance in 2023 proves to be a minor blip in superior long-term results.
Its amazing how things change. Backtesting today to 2016. Vig/ schd combo beats schd alone! I hold schd for whatever reason I always wanted to pair something with it. I don’t know why. maybe it’s the not all eggs in one basket sort of thing. I use it as defensive in my three category portfolio. Growth broad dividend/value.