An interesting question came through the blog not too long ago.
It’s a question I’ve had come up numerous times throughout the years. Writing an article about it is probably overdue.
Noticing how my dividend income can be lumpy from month to month, I was asked this:
So I was wondering if you focused on evening out the monthly income during your portfolio construction phase, or did it not enter into your planning?
This question relates to the idea of focusing on dividend payment dates when buying stocks. That would be with the purpose of buying stocks based on an express goal of smoothing out your dividend income from month to month.
For instance, I received $1,592.85 in dividend income this September. I then received $926.49 during the following month.
Some would look at that income volatility and see an opportunity to smooth things out so that there aren’t big jumps or drops between months. That would lead to buying stocks that pay dividends during the months in which one’s dividend income is lower.
I would never, ever do something like that. And if you do this, I would strongly recommend you stop doing it.
It’s a silly idea for numerous reasons.
And I’ll share two big reasons with you today.
An Intelligent Investor Doesn’t Care About Dividend Payment Dates
The first reason is the most obvious.
Re-read The Intelligent Investor, arguably the greatest book on investing ever written. Find the chapter of the book where Benjamin Graham advises you to focus on dividend payment dates and make investment choices based on that information.
Oh, wait. He doesn’t advise that.
Of course he doesn’t.
An intelligent investor analyzes a business for its fundamentals, competitive advantages, risks, and valuation. A great long-term investor looks at a business model, its story, how it makes money, and what might be a good price to pay after discounting the value of all estimated future cash flows.
Dividend metrics like yield, consecutive years of raised dividends, the long-term dividend growth rate, and the payout ratio should be considered and weighed by any dividend growth investor, as part of a more comprehensive analysis.
But the actual days on which dividends are paid should be totally off your radar.
I couldn’t care less if a company pays me on March 3 or April 19. And you shouldn’t, either.
If you prefer Stock X over Stock Y because it pays on a February/May/August/November schedule, which would allow you to smooth out your dividend income that comes in heavier during the end-of-quarter months, you’re letting the tail wag the dog. That would be letting immaterial information drive your investment choices. And it’s foolish.
Now, I understand that a lot of investors out there have a preference for stocks that pay monthly dividends. I have some of these monthly payers in my portfolio.
But a more frequent dividend payment schedule should be nothing more than icing on a delicious cake. If there’s rotten cake underneath that frosting (due to poor fundamentals, an egregious valuation, etc.), you’re making a very poor investment choice by plowing forward because you’re attracted by monthly dividends. The monthly payers I have in my own portfolio were purchased for 99 reasons – and a monthly payment schedule was barely one.
Frankly, it’s almost the same as focusing on yield and letting a stock’s current yield drive your investment choices. Chasing yield will likely get you burned.
Achieving Financial Independence Requires Good Budgeting Practices
Perhaps just as important, there’s basic logic at play here. This logic renders dividend payment dates to be completely irrelevant to people who are aiming to achieve financial independence at a young age and live off of their dividend income.
Two facts:
- Anyone who’s going to achieve financial independence at a young age is going to be very good at budgeting.
- Anyone who’s very good at budgeting is naturally going to have no problems with dealing with cash flow surpluses and deficits from one month to the next.
Thus, dividend payment dates are moot.
You cannot achieve FI without properly managing your finances. If you’re terrible at budgeting and saving, you’re going to lack the capital necessary to invest. Therefore, you won’t reach FI.
On the other hand, those who are financially fluent and able to achieve FI will be skilled at dealing with lumpy months of income.
Let’s not forget here that expenses are also lumpy in real life.
Paying attention to the smoothness of income comes across to me as very odd, as if your expenses will also line up perfectly from month to month and you can seamlessly move exact dividend income right over to exact expenses.
That’s not the real world, folks.
Income goes up and down from month to month. Expenses go up and down from month to month. If you can’t deal with that volatility in your free cash flow, you’re almost certainly never going to achieve FI in the first place.
Conclusion
An intelligent investor looking to achieve financial independence at a young age should absolutely be fully analyzing businesses and buying high-quality dividend growth stocks at appealing valuations for the long haul. Considering and weighing out basic dividend metrics like yield and consecutive years of dividend raises is important.
I built my FIRE Fund from the ground up, on a very middle-class income, by doing all of that. And now the FIRE Fund pays enough growing dividend income for me to live off.
Indeed, I retired in my early 30s by following the principles I lay out in The Dividend Mantra Way and 5 Steps To Retire In 5 Years.
But I never cared about dividend payment dates.
I would strongly recommend you don’t care, either.
Don’t be that investor.
What do you think? Have you ever focused on dividend payment dates? Why or why not?
Thanks for reading.
P.S. If you’re ready to achieve financial independence by living off of dividends, check out some fantastic resources I personally used on my way to becoming financially free at 33 years old!
Hi Jason,
yes, I never cared about, when I get the payment. Even when I buy a share I don´t look when is the ex-dividend day. So it happens from time to time, that this date was just a few days ago and the next dividend I will get is for example 5 months in the future, if its a quarterly payout.
The only recommandation is for absolutly beginners, if they need motivation to start with 2 monthy dividend payers to stay motivated. Only to see: Yes, I have two payments every month where I get a bit money. After this I would simple buy companies I want to stay a very long time into. But even a lot of investors don´t need this motivation boost and can just begin with the companies they want to invest.
On average I get around 20 – 25 payments/month, I have some fluctuations because I also own shares which are paying only one time per year. So what, these are higher paying months and others are lower paying months.
You get this question mainly from people, who are just beginning or having smaller portfolios so that they can´t wait for the next dividend. But if they have a bigger portfolio with several payments every month, the question disappears for 99%.
Regards Oliver
Oliver,
It’s a really silly concept, but you’d be surprised how many times I’ve seen it come up over the years – even from people who’ve been at the investing thing for a while.
I never thought about it at all, even when I first started with building the portfolio. I kind of already understood the gist of the two facts I shared above. That understanding negates any concern about dividend payment dates.
Thanks for stopping by!
Best regards.
I totally agree. Focus on quality companies at a good valuation and let the payout be what it will be.
I focus on dividend yearly income so sometimes when I buy a new position and get a payout within the year that is a bonus but it is not a primary or even secondary criteria for buying a stock that has compromised quality or valuation.
-Mike
Mike,
We’re definitely on the same page. 🙂
Best wishes.
Never once I have I EVER cared about a companies dividend payment date. Being 20 means that my portfolio is not generating that much yet, but as you said in the two facts it doesn’t matter when I get paid my monthly, yearly budget is not affected by it. Good post Jason 🙂
Mitchell,
Glad you enjoyed this post. Never thought I’d have to write an article like this, but it’s a question/topic that just won’t die. Finally did my part to put it to rest. 🙂
Cheers!
In a way, I can understand why some dividend investors (especially newbies) are anxious about dividend payout dates. They’re impatient. Yes, a minority of stocks pay out their dividend every month and that’s nice. But what’s more important: a risky high yielding stock that pays out monthly or a dividend aristocrat stock with a strong history of increasing its quarterly dividend? I know what’s the wiser choice. Frequency of dividend payouts should be an investor’s least concern when making an investment decision. The only time I’m concerned about payout frequency is when a stock’s payout frequency is only once a year (I’m patient, but not *that* patient) or is erratic (I like some degree of predictability).
DQ,
Agreed. It should be the last concern, if even a concern at all.
As for an annual dividend, I suppose it’s less than optimal from a cash flow management perspective. On the other hand, one could actually argue that it’d be better to receive all of one’s yearly dividends every January (rather than be paid dividends over the course of the year). Perhaps a very slight advantage in terms of the time value of money, but it’d be negligible, moot, and beside the point. I remember when Walt Disney switched from an annual dividend to a semi-annual dividend. I guess it was interesting, but my life wasn’t affected in any way.
Thanks for stopping by!
Best regards.
LOL, seems I’ve inadvertently played the part of muse.
“What do you think? Have you ever focused on dividend payment dates? Why or why not?”
No, I haven’t, for the same reasons you’ve outlined here.
The reason I asked the question is because I see a lot of similarity between you and me in both investing approach and philosophy about working jobs/FIRE.
While I am a smart person, I haven’t thought of everything, including every angle on DGI. So I like to inquire about various topics with people who share a similar investing approach and life outlook.
One thing I will do, though, is try to align my various holdings within my 3 separate accounts, based on features of each account. For example, Roth IRA gains are tax-free and there is no RMD at any stage of life. So my fast growers (e.g., V) are concentrated there.
The stuff I don’t necessarily want to hold forever (e.g., ALB) is in my 401k, since I will have to liquidate it for RMD if I live long enough. I also use this account to go “overweight” on fast growers (again, think V)
My taxable account is for slower-growth, higher-yield shares that I will hold forever (think XOM, UL, T)
DL,
Hey, I appreciate the question. Wasn’t picking on you at all, especially since you later noted that it’s not a focus for you personally. I guess it was the straw that broke the camel’s back – it’s a topic that I thought I should finally address after all of these years.
And I’m right there with you on not thinking of everything. I learn something new every day. Growing and learning is part of what keeps life interesting and worthwhile. 🙂
Thanks again for the question!
Best wishes.
This is a great article for dividend investors to hear, Jason! I’ve realized that quality companies that increase their payments regularly are far more important than receiving more payments. It’s always those higher yielding monthly payers that end up cutting payments. Thanks for sharing!
RTC,
Thanks so much!
Yeah, if you’re going after stocks because they pay monthly and/or high yields, and you’re not paying too much attention to the fundamentals and business dynamics, you’re probably gonna get burned. I have a few monthly payers. I also have a few stocks that pay rather infrequently. The dividend frequency/timing isn’t something I pay attention to or specifically base decisions around.
Cheers.
I’m glad to see you mention that expenses aren’t perfectly smooth either – and how budgeting figures in.
I saw that before I knew about FI in the early 2000s. People in the oil & gas industry have always lived by the boom and bust cycles, but every time it seemed like they got a job, got paid an easy $130K/year and instantly had a nice, new truck, a bigger house, a boat and other giant expenses.
Some jobs can justify the truck (new, reliable, under warranty because you *have* to be able to get to the middle of Wyoming, to an oil rig, at 2 am in a snow storm) in good part because the job paid an allowance of $700/month so you could get that truck.
It sure didn’t have to be that $75K truck, lifted, with a monster stereo, aftermarket wheels, long-bed, crew cab, with satellite radio and all the bells and whistles.
Anyway, all this to say that some people can’t seem to budget. They live the boom and bust lifestyle too. These people couldn’t survive dividends that were “boom and bust” from month to month.
I think I had a point here, but I forgot about it, so I’ll just thank you for the post and for using “couldn’t care less” properly. 😀
rob,
Right. Exactly. If you’re terrible at handling cash flow surpluses and deficits (i.e., budgeting), you’re probably never gonna find yourself achieving FI in the first place. It makes the whole issue of dividend timing/frequency moot.
Thanks for adding that. 🙂
Best wishes.