DIV 201Lesson 7 of 80 of 8
Growth ETFs vs Dividend ETFs
Income now or growth later, and why most people end up owning some of both.
What you’ll learn
- How growth ETFs and dividend ETFs each make money for you
- How each tends to behave in rallies, crashes and rising rate markets
- Why taxes favor growth funds in a taxable account
- Why most long-term investors end up owning some of both
Every investor eventually wonders: should I buy funds that pay me now, or funds that grow faster and pay me little? It’s one of the most argued over questions in investing forums. The honest answer is that they’re two different ways of getting paid, and each has its moments.
Two ways to get paid
| Growth ETF | Dividend ETF | |
|---|---|---|
| Example | QQQ | SCHD |
| Holds | Companies reinvesting most profits to grow | Mature companies paying out a good share of profits |
| Typical yield | 0% to 1% | 2% to 4% |
| Return comes mostly from | Rising share prices | Dividends plus moderate price growth |
| Sectors | Technology, communications, consumer discretionary | Financials, healthcare, staples, energy, industrials |
| Feels like | Exciting, bumpy | Steady, sometimes boring |
Both are just collections of companies. A growth fund owns businesses that can reinvest their cash at high returns, so they keep it. A dividend fund owns businesses that can’t, so they hand it out. As you learned in Why Companies Pay Dividends (and Why Some Never Do), neither choice is automatically better.
How they behave
The two styles tend to take turns leading:
- Long bull markets led by technology, like most of the 2010s and the AI driven rally of the 2020s, favor growth funds by a wide margin.
- Rising interest rates tend to hurt expensive growth stocks most. In 2022 the Nasdaq-100 fell about a third, while SCHD lost only a few percent including dividends.
- Sudden crashes hit almost everything. In the COVID crash of early 2020, dividend funds fell roughly as hard as the market, because banks, energy and industrial companies were seen as the most exposed.
Here’s how some of each look today:
| Ticker | Name | Yield | 1Y total return | 5Y total return | 1Y price change |
|---|---|---|---|---|---|
| QQQ | Invesco QQQ Trust ETF | 0.40% | +25.9% | +118.0% | +25.4% |
| SPY | SPDR S&P 500 ETF Trust | 0.98% | +17.0% | +91.3% | +15.8% |
| VIG | Vanguard Dividend Appreciation Index Fund ETF Shares | 1.58% | +10.2% | +66.7% | +8.4% |
| SCHD | Schwab U.S. Dividend Equity ETF | 3.26% | +23.5% | +55.6% | +19.4% |
| VYM | Vanguard High Dividend Yield Index Fund ETF Shares | 2.26% | +13.7% | +72.6% | +10.9% |
Run the comparison
Set A to look like a growth fund (low yield, faster price growth) and B like a dividend fund (higher yield, slower price growth). Then try different assumptions. Small changes in the growth rate swing the result enormously over twenty years, which is exactly why neither side of the debate can promise you the future.
Taxes tilt the field
In a taxable account, dividends are taxed in the year you receive them, even if you reinvest them. Price gains aren’t taxed until you sell. That lets a growth fund compound a little more efficiently. The difference is modest when dividends are qualified and your tax rate is low, and bigger for high earners. Inside an IRA or 401(k), it disappears. More on this in Which Account Should Hold Your Dividends?.
Income doesn’t have to mean dividends
A retiree can live off a growth fund by selling a few shares each month. Mathematically, that can work just as well as collecting dividends. In practice, many people find it much harder to sell shares when the market is down 25% than to spend a dividend that arrives on its own. That’s a behavioral reason to like dividends, and it’s a perfectly valid one, as long as you don’t pay for it with a poor total return.
Check your understanding
4 questionsA growth ETF yields 0.5% and a dividend ETF yields 3.5%. Which statement is true?
In 2022, when interest rates rose quickly, how did the Nasdaq-100 and SCHD broadly compare?
In a taxable account, why might a growth ETF be more tax efficient than a high dividend ETF?
Someone retiring next year mainly wants steady cash flow without selling shares. Which leans more naturally towards their goal?
Related lessons
Put it into practice
This lesson is for education only and isn’t financial, investment or tax advice. Tickers are used as examples of how things work, not as recommendations. Figures marked as live come from Dividend Duel’s market data and change daily. See our disclosure.