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The 4th of July, my anniversary, my birthday, and Christmas light up my year, but Easter might just be my favorite day of the year. On a monthly basis, though, payday steals the show—that spark of adrenaline when dollars hit my bank account is hard to beat. Four times a year, dividend paydays bring a similar thrill, maybe even more. This is why I’m hooked on dividends.
Dividends have trade-offs, but their potential to grow over time makes them irresistible. For example, imagine I buy a stock for $100 with a 2.5% dividend, earning $2.50 in the first year. If the stock price climbs to $150 and the dividend remains 2.5% of the current price, I’d receive $3.75 annually. This simplified illustration shows how my original $100 investment now yields 3.75%—a growing payday without selling a share. In reality, dividends typically increase based on a company’s earnings, not its stock price, but this example highlights how dividend growth boosts returns over time.
My small-scale example pales next to the dividends Warren Buffett collects from Coca-Cola. In 1988, Buffett began buying Coca-Cola shares at a split-adjusted price of approximately $3.2475 per share. Back then, the annual dividend was $0.15 per share, yielding about 4.62%. Through four 2-for-1 stock splits and consistent dividend increases, Berkshire Hathaway’s 400 million shares now earn $2.04 per share annually in 2025, delivering a jaw-dropping 62.8% yield on cost. That’s the power of holding a quality stock with growing dividends for decades.
This is why dividends are my kind of payday—they reward patience with ever-growing returns. Until they don’t. 🙂
My research was aided by AI.
Income growth v. total return: the never ending debate over which is better. My take is that this is an issue driven mostly by personal preference.
In a tax deferred account, my focus has always been on long term total return. While income generation is not unimportant, long term total return drives my investment choices. In taxable accounts, generating current income that may be taxed at higher rates will generally be less important than managing net capital gains.
I would also note that I primarily use large, well diversified ETFS and index funds, which makes investing for dividend growth more difficult. A focus on dividend growth might be better accomplished via individual issues, but this would require greater analytical effort than what I am capable of at this point in my life.
Doesn’t it depend on one’s stage in life?
Before I retired it was total return that mattered, growth in assets. Upon retirement it moved gradually to some income and preservation of assets.
My rollover IRA is all growth still. My brokerage account of about the same value includes bond funds of different types, an inflation protected fund and still some equity.
However, between all accounts I am 27% bonds and 8% cash, but that is because the funds are not used for income and I don’t plan on ever using the principal, but possibly will use the income generated.
The end result of the passage of the Billionaire Welfare Bill is gonna be a bigger federal deficit, increased national debt and rising rates of return of TBills. My guess is that longer term Bills will yield at least 5% and maybe even get to 6% in 2026. My advice: be prepared, especially in retirement accounts with no immediate tax consequences, to sell equities and buy federal debt. Or in other words, turn the current administration’s chaos into your cash flow. With no capital risk.
This is personal Finance. We all like ways we learned are successful. My plan is to have most my investments in the S&P, say 70%, and 15% in QQQ type stocks, and the rest in cash. I am an Electronic Engineer and believe in our AI future. I do not favor Bonds. I never sell in a downtrend. I am satisfied with the Dividends from these investments, overall, say 1.3% or so. I reinvest those my way, buy more S&P. I feel higher gains overall, because of the invested stocks, than with dividend stocks. I use my RMD as my income, and I can take it quarterly, or yearly, whatever I choose. This all works for me at age 79. I really enjoy all the ideas of our readers, and authors. Thanks.
I like to think of monthly income from rental property as a form of a dividend. While month to month net income can vary quite a bit, over a longer time horizon income from rental property can be predictable.
I appreciate this article and every single come about the topic.
For the last year I’ve been trying to decide which is better for our situation.
With me wife not interested in finance I’ve wondered if it it better to stay in index ETF’s so she could sell a dollar amount each month if she would need it, or invest in dividends and reinvest the dividends until a time she might need income and at that time she could turn off reinvesting.
This would only be needed if I were to pass away first
I was persuaded to rollover my 401k into a dividend fund. It is primarily blue chips and has performed well. Could I have made more? Maybe. With the same peace of mind and steady growth? Unlikely. Converting any to Roth doesn’t make financial sense.
The IRA is half of my investments. And the dividends should never tip me beyond the 12% bracket.
I start RMDs next year and the dividends now nearly equal my RMDs which gives me peace of mind as well. If the fund grows at 2% it will easily outlast me even if I slightly increase my withdrawals. I am shooting to die with zero.
To each his own.
In the July 1 issue of The Wall Street Journal, Spencer Jakab penned an article titled “Investors Are Right to Love Dividends.”
He concedes that a dividend payment doesn’t put the investor ahead since the stock price declines by the same amount.
But he emphasizes that the companies that pay dividends have value and quality characteristics that are associated with long-term investment success.
These companies have value because they have profits which are the source of dividend payments. They have quality because such companies must be more judicious about spending the cash that is not shared so dividend payouts can be maintained.
Data from the past 50 years compiled by Ned Davis Research shows that the annualized return of S&P 500 dividend payers exceeded that of non-payers and would have provided 10 times as much wealth before taxes.
S&P 500 dividend payers also beat an equal-weighted S&P 500 basket of stocks.
While there may be nothing special about dividends per se, the companies that pay them often are special.
If a company with a long track record of paying dividends suddenly said it was stopping the dividend and investing in the business, would the stock go up or down as a result?
Wouldn’t it depend on what they’re using the money on?
As I said, investing in the business presumably to generate revenue and provides. Let’s assume that. What would happen to the stock price?
Typically, the price goes down. Same if the dividend is reduced, not just lowered. There are services available that try to predict dividend cuts, such as SimplySafeDividends.com to avoid these issues.
Companies with consistent dividend growth seem to be mostly in the US. In the US, we value consistency in dividends. The rest of the world understands the issue is total returns.
I agree typically the price would go down, but that defies the notion that dividends take from stock value.
The CAPM model says the value of a stock is equal to the present value of all future cash flows. A reduced dividend means a reduced value.
I guess it depends, no? Some of the examples previously given on this forum suggest that in an effort to grow or diversify, some companies get out of their lane or moat and diversify into things they fail at.
I think this is an important process to understand
Perhaps I’m an idiot, but over a certain number of years, my initial stock shares will double, depending on the size of dividends reinvested. Even if the stock price over time doesn’t rise, don’t I now have double the shares for the original money invested? It seems like a nice proposition.
If you are an idiot, so am I. But others will demonstrate we would be better putting the dividends into a SP 500 index fund in terms of total growth which is probably correct for the value of our investments.
There’s nothing magical about dividends. What you receive in dividends you lose in the price of the stock. Still, at some point in their lifecycle, all companies should pay dividends, or buy back stock, or sell themselves. If not, they won’t make any money for their collective shareholders, as I explain here:
https://humbledollar.com/2019/11/cash-back/
I think I understand this process as far as individual stocks are concerned, but I wonder if things work the same way for index ETFs? When all of the individual stock price movement is muted by indexing, the effect of one company paying a dividend on it’s share price disappears. The effect has already been absorbed into the share price of the index by the time an owner of the index shares get the payment. And, because so many people are acquiring additional ETF shares through 401k monthly salary withdrawal investing I think that the price of the ETF does not reflect dividend payments in the same way that such payments affect an individual stock price.
Financial analysts show the long term return with dividends reinvested. And, I am sure that if you do not reinvest your dividends your return will not be the same as if you did.
Perhaps you know of some information that might further enlighten this subject?
Maybe I am wrong but I was thinking that the magic was the “yield on cost” – If I am right that does seem magical. People reacted and seemed to ignore this point.
In my simplistic world of investing and retirement income what matters to me is that each quarter I get a dividend of $5,000 or so and then, based on the price yesterday, acquire 60+ more shares of stock in the company.
I suspect any retiree would be pleased with such a transaction even when that day the stock price dropped by $0.63.
Why would one be pleased with a transaction where i have received shares which are now worth less, with the NET effect of NO change in the total value of the stock/fund ? And no, stock prices do not always go up.
Thats like saying you would be happier with 10 dimes (ie 1 dollar) vs 4 quarters (ie 1 dollar), because you like having 10 of something vs 4 of something.
You’re kinda just saying I like having an extra $20k in annual income that I don’t need. Which is a pretty obvious thing (free cash flow is always nice)
I don’t think it matters if I need I need it or not, as I said, right now it’s reinvested because I have an arbitrary goal of accumulating a certain amount of share and once achieve I will put the dividends into cash.
ultimately I see it has added income for Connie if needed, thus preserving the shares for our children.
I was just telling you how the original statement read. What you do with is secondary to that you can do what you want with it.
(it also wasn’t a critique)
It is not FREE cash flow. There is NOTHING free about dividends.
Scott’s “free cashflow” here means unallocated to a current or future expense, not free as in “something for nothing”.
Correct! It’s free to be used as RDQ wishes.
If you want free cash flow, just sell some stock.
Let me attach another article about dividends not being so great:
https://www.whitecoatinvestor.com/dividends-are-not-exciting/
The TL;DR; of the article :
‘Bottom line: Don’t bother rejoicing when you see the dividends roll in each quarter. You don’t need dividends for compound interest to work on your investments, and they’re producing a tax drag on your taxable portfolio that isn’t helping matters.”
Someone who is employed as an MD making maybe $400k per year will have a different view of the value of receiving a qualified dividend than potentially a retired person might who is making a fraction of the $400k. You pay 0% tax on them if your MFJointly income is less than approx $96.7k.
It’s even better – the $96.7 is the taxable income limit. For MFJointly couples over 55, with an HSA the Total Income limit is $137250 (137240-30000 std deduction – 10500 HSA contribution limit). If you’ve retired early, and plan well you can have quite a bit of income and pay very little federal income tax, and zero wage roll tax (FICA, FICM).
It is common on this and every other financial site on the web for people to be all excited about dividend stocks. I’m afraid nothing could be further from the truth. There’s no such thing as a free ride. There’s no such thing as free money. On the day the dividend is paid out, the value of the stocks or fund drops; you neither gain nor lose money at the time of the payout. Please read the attached post.
https://www.downtownjoshbrown.com/p/dividends-are-a-feature-nothing-more
Yesterday SCHF paid a dividend of $.1436 per share, a day when this ETF showed an increase of $.43 per share. It may be, especially in the case of a single stock, that the company’s book value show this effect. However with regard to ETFs it is totally transparent to the holder of the shares. Market value and book value are different things. Why should I care about the aggregate book value of the holdings of an ETF?
I don’t own SCHF in order to collect it’s dividends. it is just an international equity ETF that fills a slot in my allocation plan. There is nothing wrong with discussing the amount of dividends one collects from these ETFs.
In theory, yes but practically does it mean anything? If that were absolutely true would the price of a stock not paying dividends be higher by the accumulated value of the dividends that would have been paid?
when a stock pays a dividend that stock price may well drop by that amount, but quickly recoverers or maybe not. It could also have a net gain in that day. So many unrelated factors can affect price.
I still see dividends as positive and the safest way for a company to share its wealth with investors. Reinvesting dividends has also allowed me to accumulate a larger number of shares than I otherwise would have, so that could be viewed as a hidden value-at least to me it is.
i once had someone argue that my dividend yield was based on the current price of a stock, not the price of the stock at purchase. Now, that logic is something to worry about.
“i once had someone argue that my dividend yield was based on the current price of a stock, not the price of the stock at purchase.”
That’s why I don’t reinvest my dividends when the stock price is high. I either wait for a price pullback, or invest the proceeds towards another investment.
Thanks for taking the time to respond! You’re absolutely right that on the ex-dividend date, the stock price typically drops by the dividend amount—no argument there. But that wasn’t really the point of my post.
My focus was less on the immediate math and more on the long-term experience of being paid to hold quality companies over time. Dividends aren’t “free money,” but they are a tangible way of sharing in a company’s profits—without needing to sell shares. I still own the same number of shares after the dividend, and over time, if those dividends grow, so does the income from my original investment.
It’s that steady, growing stream of income—especially after years of holding—that I find exciting. Appreciate your thoughts and the reminder that every approach has its nuances!
No one here thinks dividends are “free money”.
If you read the WSJ piece, you’ll see two key points:
Dividends may be a mere “feature” of stock ownership, but they’re a useful feature in my books.
Regarding point #2, this is absolutely true, for some of us. If you don’t appreciate dividends, then don’t buy those stocks. There is a big market out there for you.
I have bought some high dividend stocks, some average, and a few no/low dividend stocks. I am not spending those dividends on living expenses yet, but expect to in the next couple of years.
if my portfolio yields between 3-4% then I can live off the dividends and pretty much ignore the stock price. Market swoon. No big deal, dividend checks still come in oin time.
the comfort factor of being able to live on dividends and ignore stock price fluctuations is significant for me. It isn’t something that I discount just because “ the price at the open the day after my stock goes ex-dividend is reduced by the size of my dividend check.”
but to each his own. That is what makes a market.
Absolutely
David:
1) Disagree- many, many people think they are getting free money from dividends
2) the figures in the article i attached, come to the opposite conclusion of your first point
3) re your second point: why would one restrict themselves to only spending dividends ? The stock market returns 8-10% / year of which dividends make up perhaps 3%. Why would you not spend some or all of the remaining 5-7% of gains ? That’s just a recipe for underspending during retirement and limiting one’s ability to enjoy that which they have accumulated.
Not saying spend it all. Not saying don’t leave an inheritance.
In fact, recents articles, from multiple sources, suggest that many of us are significantly underspending during our retirement years.
The best example, referenced by multiple authors, is a paper by Michael Kitces who showed that the average retiree dies with 2.6 x more assets than they retired with !
On spending, I think there are a lot of people (esp those with a larger portfolio) that also think in terms of an estate, so that 2.6 times is likely deliberate.
Precisely. Before you offer perspective on how someone is investing it helps to know their situation, life stage, goals, and needs. Personal finance got that name because each of us is playing a different game.
I suspect that one important point is that companies that pay dividends have limited money for capex, and invest in only the most promising projects.
I’ll give you two examples:
Microsoft paid $23.5 billion in dividends while investing $61.345 billion dollars in Cloud and AI CapEx over the past four quarters to support their Azure growth and Copilot AI services.
Yes, they are investing in their core business, which is very profitable. That does make sense.
Posted in today’s WSJ and relevant to this discussion:
Why Investors Are Right to Love Dividends
https://www.wsj.com/finance/investing/dividend-investing-stocks-volatility-068c4e5a?st=LjeCbb&reflink=article_copyURL_share
Thanks for that – I’m giving a presentation on the pros and cons of dividend stocks at the investment club meeting, this is just what I need.
Chapter 11 of Triumph of the Optimists, by Dimson, Marsh, and Stanton, is also a good read to understand more about the last century (1900-2000) of equity dividends. They cover the impact of reinvested dividends on cumulative equity returns, dividend growth in the US and UK, and around the world, as well as dividend yields around the world over time. They look at the trend of companies who have never paid a dividend, or who stopped. They compare capital paid via dividends with share repurchases to understand total payouts.
Is there a mutual fund or ETF you think executes this strategy well?
One note: Both VIG and VIGI are based on indexes of companies who have consistently increased dividend payouts over many years. Those are typically good quality companies with strong management, at least one profitable “moat” business, and consistently good operating results. Companies like that rarely pay the highest dividend yield because of the quality premium priced in by Mr. Market.
For higher yields, you have to look at value index funds like VTV (U.S.) and VYMI (ex-US). To own those, you may need a strong stomach during steep market declines. Such companies tend to carry higher debt levels which add to the odds they’ll “risk out” when there’s blood in the streets.
Until recently, ex-US stock index funds have had much better dividend yields than their US equivalents, but with prices rising over the past couple months, ex-US yields have shrunk somewhat.
VIG
And VIGI, its ex-US peer
I don’t pay much attention to dividends, the vast majority of which are in my traditional IRA. My brokerage account is all in short term bonds, which is money most likely to be tapped for home improvements in three years. The dividends in that account are tax free as I limit my taxable income below 96K filing jointly.
Overall I am a total returns investor. If I need to generate cash I sell appreciated assets, such as I did last week. With the market rebounding I was four percent over my target for domestic stocks, but I usually wait until I’m at least 5% over. In this case I decided to strike when the iron was hot due to the erratic policies of the current administration and their effects on the markets.
Short term bond dividends are likely unqualified and taxed at your ordinary income rates. Let me know if you’ve found a short term bond fund with qualified dividends.
Unfortunately you are right 😢.
Fortunately I reside in the 12% tax bracket 😊.
My wife and I likewise strongly appreciate annual income (dividends) and in addition, low-yield tech stocks. So, we have effectively dumb-belled our portfolio to be nearly 80% in stocks with a tech concentration, yet still be able to provide an annual yield distribution of just over 3% which is more than double the S&P 500 yield.
I’ve never before broken down the yield contribution of the components of our asset allocations, but here goes:
Tech Index Funds and Stocks 32% of portfolio with 0.6% yield
S&P 500 Index Funds 26% of portfolio with 1.3% yield
JEPI covered call ETF 11% of portfolio with 8.3% yield
Oil Pipeline Stocks 8% of portfolio with 5.6% yield
Bonds (bought late 2023) 17% of portfolio with 5.6% yield
Cash 3% of portfolio with 3.9% yield
Gold ETF 3% of portfolio with 0% yield
Annual yield on the whole portfolio slightly exceeds 3% despite the allocations of low-yielding tech stocks and zero yielding gold.
In addition to bonds bought mainly in late 2023, the prime yield contributors are the 20% in the JEPI covered call ETF and oil pipeline stocks. These yield-oriented investments do not fit into the indexing nature of many Humble Dollar readers, but the yields and reduced volatility have provided comfort for my wife and I to maintain a higher exposure to stocks in general, and tech stocks in particular.
Any HD reader desperately searching for yield might want to research oil and gas pipeline stocks. Two of the best companies Enterprise (EPD) and Energy Transfer (ET) are limited partnerships and report on K1’s instead of 1099’s, so there can be a tax issue unless held within tax deferred accounts where so far the UBTI tax issue (google it) has not been a problem. You can also invest in pipeline companies that are not limited partnerships which report on 1099’s – OKE, KMI, EMB, PAGP and the ETF AMLP. Unfortunately, just like all other higher yield investments – dividend stocks, utilities, REITs and bonds, they are not as cheap as they used to be.
I am OK with any critiques or downvotes for no international exposure, no small or medium caps, no total market, too small an allocation to fixed income and too much allocation to covered calls. Is it perfect – absolutely not as we should have been invested 100% in big cap tech and all spare cash should have been committed to fixed income in late 2023. Still, dumbbell investing has worked nicely for us – robust 3% portfolio yields while maintaining solid stock exposure.
The variety of portfolio choices among individual investors is incredibly diverse and nearly impossible to measure accurately. A 3% dividend yield is quite strong—especially in today’s market. I’d be curious to know: what has your total portfolio performance been over the past 5 to 10 years?
A fair but difficult question. We retired in early 2017 and in the 8 years of retirement, our invested assets have more than doubled despite significantly increased spending for: a second house near our kids, helping our two children with their down payments, paying taxes on large Roth conversions, upgrading beater cars, and general living expenses at maybe an additional 1-2% per year.
These withdrawals do not allow an apples-to-apples performance comparison. Like Mr. Quinn, we don’t spend time spreadsheeting and analyzing since our portfolio has continued to grow significantly faster than the spending creep. Roughly, the S&P 500 is up 2.6 times while our investment portfolio is up a bit less, maybe 2.3 times – which also does not include any of the family’s appreciating real estate. Our asset allocation averaged 80-90% stocks and was very tech heavy. We are gradually shifting allocations a bit more conservatively and toward yield as Bill Bernstein’s sage advice about winning the game keeps ringing in the back of our heads.
$48,000 in taxable dividends can be like a $4000 monthly annuity, except that you get paid quarterly, it grows over time, and you pay less taxes on the money, oh, and when you die your heirs get to have the shares.
In a taxable account, dividends create tax drag which lowers long term returns. Tax drag occurs when realized dividends are taxed and the tax paid lowers the amount that can be invested. Higher dividends and longer investment horizons will cause more tax drag. Capital gains are preferable to dividends in non qualified accounts. Deferring tax is always preferable to realizing it each year with the same tax rate.
and I don’t have to worry about selling a stock in a down market.
Most of our holdings are in a IRA so I am not too worried about taxes.
And I too would rather be the owner/controller of my own destiny rather than give our resources to an insurance company.
Interesting. The only time I really notice dividends is when I get my tax forms from Vanguard. Of course, they’re all reinvested.
What works for me is reinvesting dividends in my tIRA and Roth IRA accounts, and moving dividends in my taxable account to my money market fund there.
Right now I don’t need them.
At this stage in my investing journey, I’ve chosen not to reinvest my dividends—though I’m considering starting again. My goal is to maintain 15% of my assets in cash, and the dividends help replenish that reserve.
I like dividends. I only have two individual stocks but they have over a hundred year record paying dividends. Today my account was credited with $5,500 in dividends which will be reinvested on Monday and compound my investments once again. This has been happening for over 60 years little by little, slow and steady.
The yield now is only 3.03% because the stock price has been rising over the last two years. However, except for the reinvesting, I haven’t acquired any shares since 2005 and then the price was less than half what it is today. Nearly all my shares were part of my compensation.
But I don’t care. I like dividends and knowing if and when I turn off reinvesting there is more steady income for us or Connie. In the meantime the number of shares grows.
I am happy with my investing simplicity and perhaps subpar results even. Compounding is cool. 🤑
Dividends are why I love buying stock index funds on sale. As your Buffett Coke example illustrates, the cost-basis yield can produce terrific income if your purchase price is low.
And as you noted, your cost-basis yield can improve over time as dividend payouts grow with steady earnings growth. Dimson, Marsh, and Stanton peg inflation-adjusted dividend growth rates at about 0.75%/year which is slow, but still a positive real rate.
Of course, unlike Treasury interest payments, dividend payouts do drop during economically stressful periods, like the pandemic or the great recession or depression, but historically dividend payouts have moved in a much narrower range than share prices do. That dampens sequence of returns risk if you’re generating income from the stock part of your portfolio with dividends vs. share price sales. Another reason to keep your draw rate down in retirement.