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.
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.
- 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.
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.
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!