By Ian Salisbury
America has a K-shaped economy. The performance of dividend funds is similar.
The stock market has returned more than 18% so far this year, including dividends. The fact that the rally is led by fast-growing tech companies makes it hard for dividend stocks, dedicated to handing cash back to investors, to keep up.
But some have done better than others. Take a look at the $120 billion Vanguard Dividend Appreciation ETF, the market's largest dividend exchange-traded fund. It's up 16% this year. By contrast, one of its main rivals, the $72 billion Schwab US Dividend Equity ETF, has returned just 5.3%.
What gives? The two funds' approaches to dividends aren't so different from the current socioeconomic split between two Americas.
One group of people in the U.S. is thriving, with wealth rising like the upper arm of a letter K. It is benefiting from the extraordinary excitement around artificial intelligence that is lifting the prices of tech stocks and swelling the bank accounts of those that own them.
Another segment of U.S. represents the K's lower arm. The majority of consumers are struggling with tepid wage growth and stubborn inflation.
The realm of dividend funds shows the same kind of divergence. Vanguard Dividend Appreciation focuses on companies that grow their dividends, giving it a tech-first portfolio, with top holdings that include Broadcom, Microsoft, and Apple.
Schwab U.S. Dividend Equity ETF takes a more traditional approach, targeting stocks with strong fundamentals and sustainable payouts. Its top holdings include companies like Coca-Cola, ConocoPhillips, and Chevron. It is heavily invested in consumer staples and energy, two sectors that have badly lagged behind the market in 2025.
Schwab U.S. Dividend Equity has some strong points. It yields 3.8%, compared with 1.6% for the Vanguard fund, an important consideration for dividend investors who want income. And its portfolio is arguably undervalued as a result of the market's obsession with growth. Shares in its portfolio trade at an average of 14 times forward earnings, compared with 21 times for the Vanguard fund.
That means that if the market really is in an artificial-intelligence bubble, and that bubble pops. the ETFs' fortunes could quickly reverse. The tech stocks that have boosted the Vanguard fund would slide, while companies like Coca-Cola could rise as investors reallocate their cash.
That said, investors in Schwab U.S. Dividend Equity will have to be patient. With stubborn inflation and a weakening job market, consumer stocks don't seem likely to rebound soon.
And the picture for energy stocks is even gloomier. Oil prices tumbled about 20% in 2025. With oil companies still pumping at a breakneck rate, they look set to fall further in 2026.
The upshot is that as long as the market rally giving the economy its K shape continues, these funds will remain the dividend world's haves and have-nots.
Write to Ian Salisbury at ian.salisbury@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 12, 2025 15:45 ET (20:45 GMT)
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