Dividend Income vs. Growth: Which ETF Strategy Better Suits Your Retirement Plan

The Core Decision: High Yield Today or Growing Payouts Tomorrow

For those building a retirement portfolio, choosing between dividend-focused ETFs often comes down to a fundamental question: do you want maximum income right now, or are you willing to accept lower current payouts in exchange for steadily rising dividend checks over time?

The Schwab U.S. Dividend Equity ETF (SCHD) and the Vanguard Dividend Appreciation ETF (VIG) represent these two distinct philosophies. Both track U.S. stocks with strong dividend histories, yet their underlying strategies and income profiles diverge significantly—making them suitable for different retirement objectives.

Inside the Two Funds: Portfolio Construction Matters

SCHD’s Concentrated, High-Income Approach

SCHD tracks the Dow Jones U.S. Dividend 100 Index and holds just 103 of the highest-yielding, highest-quality dividend stocks. With a 14.2-year track record, this fund sports a 3.8% dividend yield—more than double VIG’s 1.6% payout rate.

The portfolio leans heavily toward energy (19.3%), consumer defensive staples (18.5%), and healthcare (16.1%). Top holdings include Merck, Amgen, and Cisco Systems, most offering yields exceeding 3%. This concentrated structure appeals to retirees prioritizing steady income streams today.

VIG’s Diversified, Growth-Oriented Approach

VIG tracks the S&P U.S. Dividend Growers Index and holds 338 stocks—more than three times SCHD’s holdings. The fund emphasizes companies that have increased dividends for at least 10 consecutive years, regardless of current yield.

Technology (27.8%), financial services (21.4%), and healthcare (16.7%) dominate the sector allocation. Major positions include Microsoft, Apple, and Broadcom. Notably, VIG’s index explicitly excludes the top 25% of highest-yielding stocks to avoid potentially unsustainable payout strategies.

Performance Reality: Short-Term vs. Long-Term Outcomes

Over the trailing 12 months (as of December 2025), the performance gap widens considerably:

• VIG total return: 14.9%
• SCHD total return: 6%

Looking at longer horizons, a $1,000 investment five years ago would have grown to $1,721 in VIG versus $1,530 in SCHD. However, VIG experienced deeper drawdowns (20.4% max drawdown over 5 years) compared to SCHD’s 16.8%, reflecting its growth stock concentration.

Both funds maintain lean cost structures. SCHD charges 0.06% in expenses while VIG charges 0.05%—virtually identical for long-term investors.

The Retirement Income Question: Why Dividend Growth Wins Over Time

Here’s where conventional wisdom gets challenged. Many retirees fixate on current yield, assuming SCHD’s 3.8% payout delivers superior income security. But the data tells a different story.

VIG’s lower current yield masks a powerful dynamic: when dividends are reinvested—or when underlying companies gradually raise payouts—the compounding effect compounds dramatically over retirement decades. A company that raises its dividend 8-10% annually will eventually surpass even high-yield competitors in total income generated.

SCHD’s concentrated approach targets reliable payers today. Yet by filtering out the fastest-growing dividend companies, it inherently sacrifices the exponential income growth that powers long-term wealth accumulation in retirement.

Cost Comparison & Fund Size

Which Fund Fits Your Retirement Strategy?

Choose SCHD if: You’re in or nearing retirement and prioritize immediate cash flow over growth. The fund’s concentrated portfolio of proven dividend payers provides stability, and the 3.8% yield generates meaningful income from day one.

Choose VIG if: You’re 10+ years from retirement or prioritize rising income streams. The broader diversification (338 holdings vs. 103) reduces concentration risk, while the dividend growth mechanism ensures your income accelerates during retirement years rather than stagnating.

The middle ground: Some retirees split allocations between both funds—using SCHD for immediate needs and VIG for the growing income engine that powers decades of financial security.

Essential Definitions for ETF Investors

Dividend yield represents annual payouts divided by current price, expressed as a percentage. Total return includes price appreciation plus reinvested dividends. Expense ratio measures the annual fee as a fund asset percentage. Beta quantifies volatility relative to the S&P 500, where lower values indicate smoother returns. Max drawdown shows the steepest peak-to-trough decline during a specific period.

The Bottom Line

Neither fund is objectively “better”—they serve different retirement stages and income philosophies. SCHD delivers immediate, tangible dividend income for retirees spending today. VIG provides the compounding dividend growth that sustains 30+ year retirements. Understanding which aligns with your timeline and income needs is the best dividend ETF decision you can make for retirement planning.