I’m a shareholder in both AT&T Inc. (T) and Visa Inc. (V), as you can see by perusing my FIRE Fund.
The FIRE Fund is my real-money early retirement stock portfolio. I live off of the dividend income it generates on my behalf.
I bought shares in both AT&T and Visa around the same time, between mid-2014 and early 2015.
My position in Visa was initiated in July 2014.
And I added to my stake in AT&T In January 2015.
Of course, as I’ve always been, I was transparent about both investments when they were made. I wrote up each respective investment thesis and shared these moves with the world.
I remember that a lot of readers were very supportive of the AT&T buy.
But many thought the investment in Visa was a bad move. I actually remember the word “speculative” coming up a number of times in comments.
Anyway, Visa’s stock has gone stratospheric since that time. My investment has more than tripled in value.
Meanwhile, AT&T’s stock has mostly tread water since that buy in early 2015.
But could a case be made that AT&T has been the better investment?
Absolutely.
Capital Gain
Let’s break this down a bit.
I’ll first go over the capital gain from the respective investments.
I bought 50 shares of AT&T on 1/28/15 for $33.18 per share.
AT&T’s stock is now priced at $37.05.
That’s a capital gain of $193.50, or 11.66%.
I bought 20 (split-adjusted) shares of Visa on 7/9/14 for (a split-adjusted) $53.83 per share.
Visa’s stock is now priced at $174.88.
That’s a capital gain of $2,421.00, or 224.9%.
Dividend Income
If we were looking at capital gain, it’s not even a contest.
Visa would be the far, far superior investment thus far. It’s produced much more capital gain – both in dollar and percentage terms.
But capital gain is only part of the picture.
Total return is, of course, the sum of capital gain and investment income.
So in order to get a better picture of how these two investments have stacked up, we need to look at the dividend income they’ve both produced to date.
Those 50 shares of AT&T produced $70.50 in dividend income for 2015, $96.00 in dividend income for 2016, $98.00 in dividend income for 2017, $100.00 in dividend income for 2018 and $102.00 in dividend income for 2019 (including the upcoming announced Q4 dividend).
That’s a total of $466.50 in dividend income on shares that cost me $1,659.00.
So I’ve received 28% of my investment back from dividends alone, at least thus far.
AT&T stock is a classic high-yielding, low-growth dividend growth stock.
It’s stock currently yields 5.45%. So you’re getting a lot of ongoing income. But its dividend growth rate is quite low, with annual dividend increases coming in around the ~2% mark over the last five years.
And you can see that playing out in the above numbers. The dividend income on that 50 shares barely moves up from year to year; however, the aggregate amount of dividend income still stands as significant because of the high starting yield.
If we were to break this down to yield-on-cost, AT&T’s stock is now yielding me 6.15% on my original invested money.
So that’s AT&T.
Meanwhile, my 20 shares of Visa produced $4.40 in dividend income for 2014, $10.00 in dividend income for 2015, $11.70 in dividend income for 2016, $13.80 in dividend income for 2017, $17.60 in dividend income for 2018, and $24.44 in dividend income for 2019 (not yet including the unannounced Q4 2019 dividend).
That’s a total of $81.94 in dividend income on shares that cost me $1,076.50.
So I’ve received 7.6% of my investment back from dividends alone, at least thus far.
Visa’s stock is the polar opposite of AT&T. It’s a classic low-yielding, high-growth dividend growth stock. Its stock currently yields just 0.57%, but the five-year dividend growth rate is a monstrous 20.4% – ten times that of AT&T’s stock.
We see how that affects the yearly changes in dividend income on that same 20 shares. For example, the $13.80 in 2017’s dividend income jumped way up to $17.60 for 2018. That’s a 27.5% one-year increase.
However, the aggregate dividend income is still quite small for the investment, even after adjusting for the fact that the capital committed to the Visa investment was smaller than that of the investment in AT&T.
If we were to break this down to yield-on-cost, Visa’s stock is now yielding me 1.9% on my original invested money.
AT&T has paid me back almost four times as much dividend income on my invested money, when compared to Visa.
Even with the huge delta in dividend growth rates as they stand, it will take decades before Visa catches up to AT&T in terms of their concurrent dividend production on the same invested dollar (or yield-on-cost).
But it might very well be beyond my lifetime before Visa catches up to AT&T in terms of the aggregate dividend income produced on the same invested dollar.
Now, after factoring in the respective dividend tallies from both investments, Visa has a better total return.
Visa’s total return is $2,502.94, or 232.5%, on an initial investment of $1,076.50.
AT&T’s total return is $660.00, or 39.8%, on an initial investment of $1,659.00.
Can we now declare Visa as the better investment?
Not necessarily.
Not for me, anyway.
Aggregate Dividend Income Is What Matters Most To Me
As someone who lives off of dividends, and doesn’t sell stocks, capital gain actually has no tangible financial effect on my life. It has no real-world practicality.
Capital gain is effectively deemed moot as it pertains to my ability to remain financially independent. It has no impact on my ability to cover my ongoing expenses.
I pay for expenses with dividends, not capital gain. I don’t go down to the net worth store and buy things with my net worth. Capital gain might look nice on a brokerage spreadsheet, but it doesn’t do anything for my day-to-day life.
Visa’s stock is doing great today. But something could happen tomorrow that leads to a massive drop in its price. Capital gain comes and goes. But the dividends are already in my pocket.
The most important metric to me as it pertains to my investments is aggregate dividend income.
Yes. You read that correctly.
The stock that can produce the most possible dividend income on the smallest possible investment is, for me, the best stock of all.
I understand this goes against mainstream investment beliefs, where total return rules the land. But many mainstream investors buy low-yielding index funds in retirement accounts, obsess over spreadsheets, pat themselves on the back for their net worth, and work at jobs they don’t like until they’re old. Then they commit to slowly selling off the assets they spent all of those valuable years of their young lives accumulating.
No, thanks.
Instead of that silly nonsense, I quit my job at 32 and now live the life of my dreams.
That was made possible by the growing dividends I collect.
Yes, Visa has outperformed AT&T in terms of both capital gain and total return.
But AT&T has outperformed Visa in terms that matter to my ability to cover my expenses with passive dividend income.
It’s producing much more dividend income today. And it’s pretty likely that it’ll produce much more dividend income 10 years from now.
In fact, it’s likely that AT&T will produce much more aggregate dividend income over the course of my lifetime. And as it relates to the amount of passive income I ultimately collect and have at my disposal to spend, that’s really the most important metric for me.
Of course, I’ll end up with plenty of total return anyhow by virtue of being a dividend growth investor. High-quality dividend growth stocks tend to outperform the market over the long term, and the vast majority of the S&P 500’s total return can be attributed to reinvested dividends.
The business growth that funds dividend growth naturally leads to higher stock prices over time. A more profitable enterprise is worth more, and it will see its stock price reflect that.
Ultimately, however, I think like an owner. Stocks aren’t just pieces of paper. They’re slivers of ownership in a real business. When analyzing a potential investment, I look at the entirety of the business as if I’m buying the whole company. With every stock I have, I pretend as if I own the respective business outright. Now, if I own an entire business, and I plan on owning it until the day I die, the street value of it matters nil to me. What matters is the growing cash flow it can put in my pocket.
The Rationale For Low-Yielding Stocks In My Portfolio
So why even buy stocks like Visa?
Yeah, that’s a great question. If I knew for sure that Visa would not produce more aggregate dividend income than AT&T on the same invested dollar over the course of my lifetime, I never would have bought it in the first place.
The problem is – and this is the same problem everyone faces with every decision they make – I don’t have a crystal ball.
Maybe AT&T is forced (by virtue of its massive debt load) to cut its dividend at some point in the future. That would change the math considerably, particularly if Visa can maintain this huge dividend growth for many more years into the future.
Because I cannot predict the future, I invest in a wide variety of high-quality companies that I feel are all in a great position to produce heaps of aggregate dividend income over the course of my lifetime.
Time will tell which one is the best of all.
Now, many of these stocks have very different yield and growth dynamics as it relates to how they get to that same end (with Visa and AT&T being notably divergent). But there are many roads that lead to Rome.
The Rationale For Avoiding Too Much Exposure To High-Yielding Stocks
If the goal is aggregate dividend income, why not just load up the Fund with high-yielding stocks?
Well, I’d repeat what I just noted above about the lack of a crystal ball.
In addition, it ultimately takes a high-quality company to regularly grow its free cash flow enough to sustain growing dividends for a very long time.
Stocks with huge yields (say, over 10%) are often junk.
And that’s precisely the reason why I don’t just load up the Fund with high-yielding stocks.
Yield is generally a proxy for risk. Stocks with sky-high yields tend to be riskier in terms of the business model than stocks with lower yields. Thus, stocks with big yields can often be attached to inferior businesses.
And so those big dividends might looks great today, but they also might be gone tomorrow. Then you’re left with much less aggregate dividend income over the long run than had you simply stuck with higher-quality companies that could reliably endure through thick and thin, allowing you to compound those growing dividends year in and year out. That’s not even to mention the potential loss of initial capital on the investment, putting you even further behind.
Thus, I’ve built the Fund in a way that is heavily reliant on some of the highest-quality companies in the world. The top 10 FIRE Fund holdings are world-class enterprises that are all in a great position to produce tons of aggregate dividend income over the course of the rest of my life.
That said, I do have some higher-yielding stocks when the balance between business quality and yield promotes the right environment for long-term investment as it pertains to my long-term goal to seek out the maximum amount of aggregate dividend income. AT&T is, of course, a pretty good example of that.
Conclusion
I thought this was an interesting exercise to take a look at two wildly different dividend growth stocks. I also wanted to provide you an opinion and perspective that runs contrary to a lot of mainstream investment information.
These stocks have performed very differently in key areas, but I knew what I was getting into when I made the investments.
I knew that AT&T was a high-yielding, low-growth dividend growth stock. The stock has done exactly what I thought it would do. The stock price hasn’t been very explosive. But it’s producing gobs of dividends.
Likewise, Visa has done exactly what I thought it would do. It’s a low-yielding, high-growth dividend growth stock. The stock price has increased meteorically. And the YOC is growing quickly because of the big dividend raises, although it will be difficult for it to catch up to AT&T on aggregate dividend income produced on the same invested dollar from the time of investment until my death.
In the area that matters most to a retired dividend growth investor in his 30s, AT&T’s stock is definitely pulling a lot more weight in my portfolio.
I rely on growing cash flow in my pocket, not fluctuating stock prices.
And when it comes to growing cash flow, AT&T has been fantastic.
In fact, I would deem AT&T to be the better investment thus far, at least based on what I need out of my stocks.
Maybe AT&T cuts its dividend at some point. Maybe the math changes and Visa ends up producing more aggregate dividend income. Time will surely tell. If the facts change, I’ll change my mind.
But looking at where things are at approximately five years into this experiment on these two stocks, AT&T is way ahead.
Full disclosure: I’m long T and V.
What do you think? What matters most to you as an investor? Surprised by the results here?
Thanks for reading.
P.S. If you’re interested in living off of dividends at a young age, check out some awesome resources I personally used on my way to achieving financial freedom at 33!
That’s an interesting take. Why don’t you sell Visa now and buy AT&T?
I don’t think Visa’s dividend will ever be as good as AT&T.
I’m more mainstream and look at the total value of the portfolio. To me, Visa is a better investment. Just my opinion, of course.
Joe,
Why not sell Visa? I answered that question in the article. Twice, actually. You’ll also notice this passage:
“As someone who lives off of dividends, and doesn’t sell stocks, capital gain actually has no tangible financial effect on my life. It has no real-world practicality.”
That passage includes a link to another article about why I don’t sell stocks. You commented on the article, but you might have forgotten about it:
https://www.mrfreeat33.com/why-i-will-never-sell-another-stock/
Yeah, it’s an interesting take. I guess I’m an interesting guy. If I were like everyone else, I certainly wouldn’t have quit my job at 32, moved abroad, or done a great many other things. I’d instead be doing stuff like everyone else does. I’m glad to be interesting. 🙂
Best regards!
Thank you for sharing this valuable concept of yours, simple enough for me to understand. Although you didn’t mention about tax implications on dividends versus capital gains, I thought of buying stocks (house sale) with the hopes of living off the dividends it generates when I retire in a year @60.5 years old. Tax implications may not mean much to you though because of your residency status, not in my state of NY. Looking forward to your other articles.
Carmelita,
My pleasure. Hope you enjoyed it! 🙂
Capital gains and dividends on common stocks are usually taxed the same. They’re both advantageous, relative to, say, W-2 income. It’s just that capital gains can be more customized in the sense that you can (or rather are forced to) actively trigger the capital gain.
If I were concerned about taxes, I’d be looking at it less from a capital gain versus dividend angle (because there’s not much to differentiate), and more at it from the angle of maybe living somewhere that’s more advantageous for tax. It’s one reason I committed domestic geographic arbitrage back in 2009 (moving to Florida), then later international geographic arbitrage (moving abroad) in 2017. Said another way, I’d think bigger and more holistically about an overall tax plan, which would be far more beneficial.
Cheers!
Hi Jason,
This is a good point and may spark an endless debate. On one hand you are an owner entitled to the slice of company earnings whether or not they are returned to you in the form of dividends like BRK and GOOG which have both compounded earnings very nicely.
However given that you need to live off the earnings then these entities that hold back all the profits don’t serve that purpose. So a balance between the two is what is ultimately needed.
I personally believe that BRK will initiate a dividend and probably spin off some great assets but it won’t happen until Warren passes on so who know how long that is. I guess having coke running through your veins may not be all that bad for longevity!
-Mike
Mike,
I don’t actually look at it as a debate at all. I’m simply explaining what I need from my investments, as well as why AT&T has served its/my purpose better.
Someone else may very well look at totally different things in their investments. I mean, some people fawn over gold. To each their own! 🙂
Cheers.
Yes, yes, and yes! As simple as this sounds, this is so hard to explain to some people. I have about three people that I will refer directly to this article.
Something else not mentioned, when you are in the accumulation phase that early cash can be deployed into more stocks, thus more dividends, thus more stocks…… it would be very hard to track but given that early “snow” for the snowball, it may take more than just decades for Visa to catch up. (Btw I’m not anti Visa)
Who knows how far your own redeployed cash has gone in five years, but just assuming the average portfolio rate from day 1 of purchase – it definitely moves the needle in T’s favor for both your method of investing and a more traditional approach.
Rob,
Appreciate that. Hope those three people enjoy the piece and find value (or at least clarity) in it. 🙂
Yeah, you’re talking about the reinvested dividends leading to new stocks and ongoing streams of capital gains and dividends of their own. I originally had a whole passage about that regarding AT&T, but I felt like it was getting away from the core message. But I did include the paper (linked above) that shows to what degree reinvested dividends account for the TR of the broader market. It’s very substantial. The only way to really look at something like this in terms of one’s own portfolio is to run an XIRR. I think my lifetime dividend total is coming up on $70,000. That’s a pretty good percentage of the total value of the portfolio. And that money has bought a lot of stock all by itself.
Best regards.
“I think my lifetime dividend total is coming up on $70,000. That’s a pretty good percentage of the total value of the portfolio.”
Approximately 1/6th. That’s an incredible number, when you think about it. Assuming you live to 88 (not at all an unreasonable assumption), and given dividend growth, you may well get back 20x your original investment.
It is the beauty of DGI.
BTW, I have no clue what my lifetime total dividend income is, and I am now a little bit sad that I didn’t track it.
One aspect missing from the equation is taxes. Capital gains (assuming their sustainability) result in deferred tax liability whereas dividends are current taxable events. Probably doesn’t move the needle in your case but could sway the decision for investors in different circumstances.
seekingreturns,
Sure. That might move the needle a bit, depending on the circumstances. But dividends are so extremely tax-advantaged that it doesn’t make a difference in many cases, since qualified dividends are taxed at 0% up to a very generous point.
Regardless, it’s cash flow versus not cash flow. I wouldn’t show up to some job every day for equity that might be worth more (or not) in the future (out of a tax consideration). I would show up expecting my paycheck. I want money in my pocket. And I want that money to regularly increase.
Cheers!
Excellent article Jason. One of your better ones.
I learned my lesson with 3 high yielding stocks that are now slashing the dividend. In my case, I did sell. I’d rather take the money I have from the sales and move forward with more solid companies like T. A big reason I got out was that all three of these companies (AGNC, NLY, and ANH) were not only cutting the dividend, but were sinking in value. As they were sinking, their payout ratio was way underwater, leading to future div cuts. They are on a pace of being a worthless stock in a few years.
I calculated that I would be much further ahead in 5 years If I took the money and bought DAL and SYY.
cheers,
John
John,
Hey, sorry to hear of the troubles. Not nice at all.
I never could understand many of those mREITs. I actually linked to an article above (thinking like an owner) that highlights the importance of knowing what you own (using NLY as an example of something I don’t understand). On top of that, many of those sky-high yields are a pretty good proxy for risk. Not always. But often.
We live and learn. I’ve never regretted a single mistake I’ve made, even though I’ve made plenty. I learned from each mistake and came out better and smarter for it every time. 🙂
Best wishes.
Correct. No regrets either. Just experience to learn from.
Hi Jason,
I totally get your view and tend to agree a lot ! I think its funny a lot of people think, oh I’ll just say sell some Visa or similar stock when I need the money. Assuming that when they need the money that the stock will be selling at a good price at that point. With a recession every 4-5 years I think this is a big risk.
Another thing about just using Dividend spending once someone is retired is dividends it is a forced controlled spending. Sort of like a Pension so you won’t spend more then you make. Where if you sell your shares of say Visa your cutting down your money tree.
Remember the people who believe in the Visa / Google style investing are going to be HOLDING stocks for say 10-20 years and all the sudden with no practice start SELLING with all sorts of risk and emotions at say 50-60 years old. Hopefully timing the sells perfectly.
thanks for the great article I always learn from you,
Ivan
Ivan,
Glad you enjoyed the article! 🙂
A lot of ifs ands and buts in a plan like that, where you’re trying to precisely dismantle an asset base you spent a good chunk of your life building. I’d rather just collect my growing passive dividend income, pay my bills, and enjoy the early retirement lifestyle. It’s almost too easy. People overcomplicate stuff.
Best regards.
Great article Jason. I love how you show that there are many different aspects to investing, and hopefully those reading it will realize that a multi-dimensional investment strategy is probably a good thing (for most people), that not everything that glitters is gold, the importance of time and patience in the market, the value of knowing ones financial situation / goals, etc. You continue to educate in a very tangible / easy to digest format, and I hope that once in a while you engage in similar exercises. You are very clear in your writings that you are an aggregate income guy. You actually helped me understand that concept in a convo we had way back when, and I shifted a bit of my resources to aggregate income because I am fast approaching semi-retirement @ 52 FIsRE-ish. Keep up the great work!
Andrew,
Thanks a lot, man! 🙂
52 is great. Better than in your 60s (or never at all). I try to tell anyone who will listen that this lifestyle is too good to pass up and not experience firsthand. Collecting your growing dividends like a boss, while you go about your life as you please. It’s unbelievable. I feel blessed. And I do what I can to inspire others out there.
Best wishes!
Jason, I think you did a great job explaining your view on that quite controversial topic. Personally, I can very well understand that T has been a better investment for you than V – although the total return numbers might say something else. It all comes down to the individual goal. In your case, it’s dividend cash flow. T serves you well to meet that goal. V shows some fantastic capital gains in your PF, which is also good. However, those capital gains are not generating dividend cash flow. They are just sitting there and looking nice.
I own both stocks, T and V. Like in your case, V has much higher capital gains but much lower dividend cach flow than T. One day I might decide to realize V’s capital gains and invest it elsewhere (who knows maybe in T) to grow the dividend cash flow. Doing so I can significantly increase the cash flow without investing fresh money. For me, it’s an additional argument to own stocks like V.
-SF
Snug,
Thanks. Appreciate that. Glad the rational explanation came across well. 🙂
But I don’t really see any of it as “controversial”. It really all comes down to what you need from your investments. I don’t see gold as controversial, although I wouldn’t want to ever personally own it. Different reasons for different seasons, and different investments for different objectives. This might go against the mainstream ideas, but I’ve already noted that I don’t want anything to do with a mainstream life path.
Cheers!
Hello Jason,
Thanks for the article. I am perhaps thinking out loud here as I type so hopefully it is fairly coherent 🙂 . One bold face sentence you have above in your article has generated some thoughts for me and perhaps you’d agree – which may be a matter of semantics. Nonetheless, you state above that “the most important metric to me as it pertains to my investments is aggregate dividend income.”
If dividends are merely a derivative of a company’s ability to generate earnings for years, if not decades to come (and subsequently free cash flow), would not this be a priority above a dividend in and of itself? Or perhaps you’re implying that you first look to see if the company pays a dividend and then assess its ability to generate earning to grow the dividend rather than the reverse in an effort to save time from evaluating a company that may have great earnings potential but one you wouldn’t consider for the time being if it doesn’t pay a dividend? Some may go bit further to say that preservation of capital is rule or metric numero uno, and I wouldn’t disagree, but rather would say that would be inherent to long term investing (in the sense that an investor is concerned with long term earnings potential) – not only is there the intent to preserve an initial value, but to grow that value over time at a rate equal to or greater than inflation. The trick in all of investing is determining the price of which one pays for the value received so that the PV of all consideration received in exchange for that price is > the price entry point.
Continue living your best life!
PIV,
Thanks for the feedback!
I’m not sure I totally follow where you’re going, but I think you’re delving into a company’s ability to pay a growing dividend in the first place. This article might make sense:
https://www.mrfreeat33.com/the-importance-of-being-both-willing-and-able-to-pay-a-growing-dividend/
Suffice to say, if a company lacks the ability and/or willingness to pay a growing dividend, I’m not terribly interested in investing in it.
Best regards.
Hi Jason,
I understand where you are coming from with this article and don’t disagree with your conclusion as it relates to your situation. Out of curiosity, if several years from now you ended up having a portfolio full of “Visas” and were sitting on a giant mound of virtually useless capital (according to your purposes of cash generation), might you change your thought toward selling? In other words, if you could harvest a massive amount of capital gain and instantly redeploy that capital into cash-yielding investments (maybe even something low risk like CDs or similar) that would provide you with far more income during your lifetime than you could ever realize by just sitting on the low-yielding highly appreciated investments, would you consider doing that? I realize your objective is to not have to worry about what to sell and when, but from a practical standpoint in a situation like that, you could execute a one-time reallocation and improve your current situation/income without much effort. Yes, I’ve read retirebyforty’s comment above and your response and realize my question is similar. I just fear for you in that you may accumulate a high net worth in your late years and you would never benefit from it. Have you done a significant amount of estate planning? If you continue your current philosophy forever, you’ll certainly have assets to pass on after you’re no longer here. Nothing wrong with that! Just thought I’d ask. Thoughts?
Thanks for the inspiration!
ERS,
I’m not going to get into a debate here. It’s just my perspective. You have to invest in a way that best suits you. This has obviously worked well for me. And I’m providing this insight and real-world practicality for others who want something similar. 🙂
Sure, if you have a whole portfolio full of Visa-type stocks, you’ll be sitting on a ton of net worth. But then you’re talking about having that crystal ball, relying on the stock market to assign you the appropriate pricing at the appropriate time, selling off the assets you built at the right time, etc. You can also go mainstream, build up a portfolio of funds, and then shoot for a 4% SWR (or whatever). If I wanted a mainstream life, I might have gone that route. But I’m sitting here in my 30s, living off of growing dividends, and enjoying the life of my dreams – which is very much not mainstream. To each their own, really.
All that said, what I do is somewhat akin to a 4% SWR (due to the portfolio’s yield being close to that mark). It’s just that my growing income comes without me doing anything. It’s totally passive. I get the cash flow and go about my life. I don’t have to worry about slowly draining my assets/worth, which I think is a nonsensical thing to do. I rely on businesses as a medium, not the stock market.
As for the estate, the bulk of it will go to philanthropic organizations. The same organizations I give to now.
Cheers!
Thanks, Jason! In my first reply, I was just wondering if you could ever see a time in your life where you might acknowledge your wealth (rather than your income) and utilize it for your own benefit rather than leaving it to others. If you’re as happy in the future as you are now, there would be no reason to consider potential changes/upgrades. I was just wondering if you could ever see your mindset flipping, even on a one-time basis. Cheers!
ERS,
Hmm. I don’t think it’s an either-or scenario. I’ll almost certainly end up a millionaire many times over, even if I stop adding fresh capital to the portfolio. That’s simply the nature of compounding:
https://www.mrfreeat33.com/could-i-become-a-billionaire/
What this means is, the passive and growing annual dividend income the Fund generates on my behalf will at some point end up being far more than I could ever conceivably spend in a year. It’ll be this runaway income snowball. Hard to say at what age it becomes superfluous like that. But probably before my mid-60s.
So, no, I can’t imagine a realistic scenario in which I’ll need to tap into wealth for personal reasons. The only thing I can really think of would be some kind of health problem. But the odds of such thing being a concern are tilted toward the later years of my life, which is already after compounding will have made me incredibly wealthy.
I think/worry about money very little these days, to be honest. The FIRE lifestyle, as I live it, is 1% money and 99% everything else.
Cheers!
Awesome! Thanks for the consistent responses. I can see that your happiness is not derived from material things, but rather on experiences. As such, I can see why you would have no interest in tapping into your wealth at any point to buy exotic cars or “enjoy” your wealth in other flashy ways. Great mindset! Thanks for responding to me multiple times. Carry on!
“Well, I’d repeat what I just noted above about the lack of a crystal ball.”
Allow me to do the same 🙂
I think it is a wise decision on your part to decide you will never sell a stock again. But I note that you don’t have a crystal ball. Neither do I.
God forbid something dire occurs in your life, and you need, are forced to, sell some equity to cover this hypothetical critical emergency.
In such a case, a massive capital gain on a low-yielding stock might (emphasis “might”) be the recourse that you need. Just sayin’
Now enough of these gloomy thoughts – let’s go back to enjoying life!
Grisly,
Definitely. I don’t know what’s going to happen in the future. All I can do is make the best choices possible with all known information in front of me. I think I’ve made a number of major life choices that limit my odds of some kind of very expensive emergency. Now, if I were living and looking like a more typical American, and living in America, I’d be more concerned. That’s simply because the prevailing lifestyles over there are conducive to putting one at greater risk of experiencing things like car accidents and heart attacks. And emergencies are very expensive over there, even with insurance.
As for selling off stocks, it’s possible that a significant emergency could pop up and require me to sell off holdings. But such an event is remote. Any kind of realistic scenario would most likely be covered by a combination of cash on hand and ongoing cash flow. But even if I did have to sell stock, it’s not like I’d necessarily be in a better capital gain position as it relates to low-yielding stocks. There are low-yielding stocks in my own portfolio that have been totally lapped in terms of capital gain and TR by high-yielding stocks. I would point to ALB versus DLR as an example. I used T and V in this article specifically to make my point clear.
Since we know that reinvested dividends account for the vast majority of the broader market’s total return over the long run, and since we know that high-quality dividend growth stocks outperform that very same market over the long run, it makes sense that focusing on stocks that provide growing dividends that can be reinvested will put you in the best overall financial situation to deal with any kind of unlikely emergency – even if TR/capital gain isn’t really a goal or something that might ever be tapped into. This dynamic is amplified when one’s portfolio has a yield that’s much higher than the broader market.
Best regards.
Hi Jason,
I think one of the most discussed questions when it comes to stock investments. In my opinion it is useful to have all sorts of stocks in my portfolio. If I only look to dividends, I would invest in stocks like high yielding relative solid REITs and shares like AT&T. The disadvantage with this strategy is, that you always fight against the inflation. Lets say, you have 500.000 $ in 6% high yielding shares, you will get 30.000 $ dividends. You have to pay some taxes (not too much) and I think, even in the USA you can live with that a modest live. But if you have say 2% inflation like nowadays, you have without increases 600 $ income loss. AT&T is increasing in that rate, but many REITs are only stable with their dividends. So it would be necessary to take some money from the dividends to balance the loss. If you have for example 300 $ effective dividend increases, you need to invest around 10.000 $ to get the missing loss from inflation. And after this your income is not that high any more.
Despite this you wrote correctly, that you have a higher risk with higher yielding stocks. So you have also to balance your portfolio, if you lose one or more companies. OK, this is with high and normal yield stock the same and it also can happen with one of these companies, but the yield loss is less.
That´s why it is useful to include growth stocks and also normal growth stocks into a portfolio. They grant you most of the time the increase of dividends and they compensate the low growth of higher yielding stocks. So you are not forced to invest after FI. Regarding the capital returns: I think this is also not that uninteresting, especially when you are young and starting with investing. I´m a big fan of Apple shares, its my biggest position. Not because that I have invested myself so much, it´s simple the return of the shares and in the meantime the dividend is also quite high. I would not sell them to buy for example AT&T with that money. The main reason is, that I don´t need the yield today to cover my expenses. And I can sit on some growth stocks. They are making me wealthy only holding them.
It depends what you need and what you want. If you are older (let´s say 70), you can switch everything to REITs and high yielding stocks. You don´t have to live 50 years with your portfolio and the older you get, the lesser is your need of doing active things.
What you can also include in your calculation is the reinvestment of the dividends in further AT&T. So it would be more positive overall and it is quite normal, when you are in the saving phase, that you reinvest your dividends.
A good article that it is important to look at your own goals and what works best.
Regards Oliver
Oliver,
Well, I do think people vastly overestimate the effects of inflation. I didn’t find inflation bothering me that much when I was still in the States – and I lived there for decades. It’s been effectively rendered moot now that I’ve moved overseas (due to a combination of a lower inflation rate and a much lower base upon which that rate is occurring). But inflation as a rate of growth is much less of an issue than the base upon which that rate of growth is occurring. As such, your spending and the impacts of inflation on that spending comes down to personal choices more than anything else. Said another way, lifestyle choices and lifestyle inflation will probably impact you a hell of a lot more than economic, country-wide inflation. This is something that continues to confound people, to my surprise. I think it’s cognitive dissonance. And it’s easier to blame inflation than it is to man up and admit you’re making the wrong spending choices. Inflation hasn’t been a boogeyman for me largely because I’ve been smart about my spending and lifestyle choices.
With that in mind, it’s even more important to look at the base upon which dividend growth is occurring, rather than the dividend growth rate itself. That’s assuming the end result of total dividend income collected over the lifetime of an investment is what you’re looking at. I illustrated this above. Even a fast growth rate on a very low base will put you way behind over the long run, in aggregate terms (which is what ultimately matters). Moreover, I think you’re underestimating the growth rate of a lot of high-quality REITs out there. Growth rates vary, because these are all individual businesses with individual dynamics. But I’ve been happy with the dividend growth rates of the likes of DLR, O, STOR, etc. There are a lot of other great REITs out there with strong growth rates, but I don’t own them. Either way, it’s really aggregate income that matters. Some high-growth stock that eventually outpaces some higher-yielding stock on aggregate dividend income produced doesn’t matter to me if the former overtakes the latter after I’m dead. You have to model this out for yourself and use your own circumstances, but aggregate dividend production over the course of one’s life would naturally portend a preference for a strong starting yield (though not at the expense of all growth).
Best wishes!
Hi Jason,
regarding the Inflation rate it is not that easy as you write (my opinion). The economcs changed quite a lot and it will also change in the future.
I bought myself the first shares in 1984 with 18 years, a complete different time as today. We had quite high inflation rates between 4 – 7% with the Deutsche Mark. This currency was strong in Europe, there was only Schweizer Franken which is a stronger European currency.
I added the development for the inflation rate in Germany from 1992 – 2019:
https://www.finanz-tools.de/inflation/inflationsraten-deutschland
You only see the first two years 1991/92 with higher inflation rates, but these firgures were quite common between around 1970 and 1992. I don´t know how it was before. After this it went more silent between 0 and 2,5%. This doesn´t mean that we get next year 4% or whatever, but be sure that everything will change one time. And we are talking for long time frames, so this can get significant sometime in the future.
Even the Dollar was not that stable. The inflation is nearly similar to Germany/Europe, I think the Dollar is a bit better. I found this graph for the Dollar:
https://de.global-rates.com/wirtschaftsstatistiken/inflation/verbraucherpreisen/vpi/vereinigte-staaten.aspx
You can see that it is more stable the last decades, but 1991 it was also a short time 6% (Iraq-Crisis).
What I mean: Nobody should have concerns with inflation when the rate is between 0 – 3%. You will have no problem with a good portfolio with different shares. Even 4% and a bit above is not that critical, because the revenues of the companies are also increasing. If you are above lets say 4,5% you will see, that it is not that easy to compensate inflation. So I don´t think every day regarding inflation, but my overall target is to have a net increase, which is above the inflation rate. Nowadays no problem, and you see that your portfolio doesn´t have any problem to beat the inflation of today. But you also have a lot of common average shares, which are normally increasing dividends much higher than the inflation and they are not only shares like VISA with very low dividends and high dividend increases. I mean the shares you have in your portfolio which are on the first 10 places you presented some time ago. I think, these were your strongest investments you made in the past.
Regarding the REITs: Yes, I also have some which are increasing dividends. Look at WPC, O – the increases are moderate. You also have HCP, OHI which have increased in the past dividends and stopped some time ago. I also have for example ARI, STWD or Welltower. All nice dividends but the last dividend increase was some years ago. OK, regarding the capital gains I´m with every of these companies green, with some far in the green. My first target is, that I will get high dividends from every of these companies. But lets say form Welltower when I get 0,87 cents/share/quarter this year, this is more than ,87 cents next year. To compensate I also have shares like Apple and other companies who are increasing dividends in a high rate. This is part of my strategy: Increasing dividends, with a growth rate above inflation. So I will never come in trouble.
With the cost and lifestyle inflation I agree with you. This is not a great task for me personally, I have the tendence that I don´t want to consume more than necessary. So my COL are stable the last 10 years. I simple buy fewer things than 10 or 15 years ago, so I do not need more money. I assume, when I move to Greece next year that I even need less money than today.
Oliver
Oliver,
We’re getting way off track here. Inflation in 1992 Germany doesn’t really have anything to do with this article. Moreover, I just explained that focusing on inflation as a growth rate, instead of focusing on the base upon which that growth is occurring, is totally missing the forest for the trees. It’s myopic. You want to do the math on the absolute changes in costs, rather than the relative changes. This article explains it with more detail:
https://www.mrfreeat33.com/why-i-no-longer-worry-about-inflation/
Inflation is about the last thing I worry about. That’s because I’ve learned to control the base upon which that inflation is occurring, which thus reduces my aggregate costs over the long run (which is what actually matters). I can’t control inflation. But I can control the base to a large degree.
It’s just like how I’d gladly trade my portfolio, with its high-single-digit organic dividend growth, for another portfolio that’s producing $500,000/year in dividend income with 0% growth. It’s all about aggregate results over the course of one’s life. People who look at the growth rate instead of the aggregate are bothering themselves with a sideshow.
Best regards.
The holes that people have tried to poke in this discussion are….. for a lack a better words, annoying.
It’s like there is some sort of irrational fear that your own personal “gainers” aren’t as awesome as you think in a true DGI sense and people are running to taxes, “would you sell if this”, x, y, and z, and even the 1992 inflation 😂😂😂.
Read the article, open up your mind to a different understanding of portfolio value. (There is more to it than account dollar value!)
Every article on this site for years has focused on:
Account value < freedom and time gained from account value.
T has provided more freedom and time gained than V thus far. That’s it!
Rob,
Yeah, it’s super interesting. I actually want to follow this piece up, because I received an email from someone who was arguing total return and saying I was leaving money on the table by favoring dividends like this. But if you’re truly a long-term buy-and-hold investor who DOESN’T EVER SELL, the only money “left on the table” is the dividend income you didn’t end up collecting before you died.
Moreover, I’ll probably end up exceeding the TR of the market by virtue of investing in high-quality dividend growth stocks and holding forever. The data proves that out. Ending up doing better than all of these people banging their head up against a wall, without really even trying, would be ironic…
I’ve been writing about this same stuff for years. I find it funny when some people are suddenly shocked, as if I haven’t been explicit. The old tagline of Dividend Mantra was “Dividends – Frugality – Financial Independence”. Capital gain was purposely left out.
If account value was something I really cared about, I wouldn’t have quit my job at 32. I’d be close to a millionaire by now had I stayed in the rat race. But I’m not like most Americans who have this sick obsession with money. All I ever wanted was my freedom. And AT&T, based on growing passive dividend income, is buying me more freedom than Visa.
Thanks for adding that!
Best regards.
Another great and thought provoking blog entry, Jason. Thank you. I find myself caught between adopting a dividend growth investing strategy and a (no dividend) pure growth stock strategy in my own investing journey. Frankly, I prefer the DGI approach. But I got started too late in investing (didn’t get serious until my 40’s), and figured I had to take more risks to catch up. I have had this vague notion that I need to grow my portfolio total fast with growth stocks to catch up, and then will switch to dividend stocks when I am close to retirement. I find myself now 50 years old, with a portfolio of mostly SaaS stocks. Which have gotten hit hard the last few months. I hope to have enough to retire in ten years.
One of the big reasons I’ve hesitated switching over from growth stocks to a DGI portfolio, is that most of my stocks are contained in my 401k and IRA (both traditional). It bugs me that I’ll be forced to sell off pieces of my portfolio when I’m 70.5 years old, in RMDs. It seems to me this defeats the very point of having a DGI portfolio, which is to have increasing dividend income for the rest of my life. Do you think having most of your investments in a retirement count obviates DGI, due to the looming RMDs that you eventually have to pay? I was just wondering how you would approach this if your DGI stocks were in a 401k rather than a taxable account. That’s the main reason I have been investing in pure growth stocks, because I know at some point (70.5 years old) the government will force me to sell for capital gains anyway. I wish my money were all in a taxable account or all in a Roth, so I would never have to sell off any of it. Thanks again for your all your writings and for the inspiration you give all of us investors.
Tim
Tim,
Sorry to hear of the recent troubles. The idea that one can invest in one thing just right, perfectly time a transition, then flawlessly switch over to another thing, is something people dream up in forum boards or something. It’s for people who debate the hypothetical and live their lives on spreadsheets. To me, that’s complicating something very uncomplicated. Moreover, I’ve always preferred dealing with real-life money, real-life scenarios, and real-life results. That’s why I’ve been tracking all of this since almost $0. The strategy I’ve written 1,500+ articles and two books about is a very straightforward path to a lot of passive income and a lot of wealth (even if it’s not something you’re actually chasing). And, of course, it’s a very straightforward method to achieve FIRE. I’ve proven it out, using my own life as a kind of experiment. If people want to do this or that with their own money, that’s on them. I have no interest in debating people or convincing anyone of anything. This works. Simple as that, really. To each their own, though. 🙂
I really can’t say much about what you’re doing over there, because a lot of it is almost antithetical to what I believe in, how I’ve gone about it, and how I’d advise other people to go about it. Non-DGI stocks, a traditional life path/retirement, heavy exposure to retirement accounts, etc. That’s all stuff that I’ve been very explicit about avoiding.
By the way, there’s no reason that someone in their 40s can’t start up DGI and still retire very early/quickly. I’ve laid all of that out repeatedly. It would just require some adaptability and the ability to think outside the box a little bit. It certainly wouldn’t involve a 401(k), which, in my mind, is a tool designed to keep you handcuffed to your job until you’re old.
I’d say that if you really want to radically change your path, you have to radically change how you’re going about it. Input and output.
Best regards.
Thanks, Jason! I really appreciate your response. You’ve given me a lot to think about.
Tim
Very timely article. I just got hit pretty hard by the selloff of Roku stock. I use the product every day and bought a few shares only to watch the price plummet after a few analyst downgrades.
Your article really made me think about the difference between fast growing, non-dividend stocks vs. consistent, dividend growth stocks. It’s like the tortoise and the hare. Slow and steady wins the race. Without a dividend, you can have your entire capital gains wiped on within a few days. Non-dividend paying stocks carry a lot more risk without any guaranteed returns.
As I look at most of my dividend stocks, I’m in the green and the dividend income is much slower but I’m preserving my capital and getting extra income in the process.
Perhaps the public is impatient because dividend growth investing takes years to see good results. Most people want 200 to 500% gains within a couple months. Of course, you can lose everything just as fast.
I’m in my 30’s and realize I’ll need to load up on more dividend stocks so I can retire early. Thanks for the important lessons here.
investortrip,
I’m glad you found some value in the article! 🙂
High-quality dividend growth stocks go up and down, too. But you’ll usually see a lower beta among most of the quality businesses out there. So you’ll likely end up experiencing less pricing volatility over the long run.
However, in the area where volatility matters MOST to me – my passive dividend income – volatility is practically non-existent. Well, except for the fact that the dividend income is generally rising year after year.
This is a big reason why I honestly just couldn’t care less about the prices of the stocks I own (other than to maybe enjoy seeing them go down so that I, or these companies, can buy more).
Thanks for dropping by!
Best wishes.