Dividend Growth Investing

Update by JL’s Team

Fact check time: If you’re considering single stock dividend investing (against JL’s advice, of course) versus index investing, in 10 years which will provide a better return?

JL first published this post in December of 2011, and we wanted to see if his advice passed the test of time. JL references Coca Cola (KO) as a popular dividend stock, so we compared a $10,000 investment in Coca Cola vs VTSAX (both with dividends reinvested).

Which one came out ahead? Check out the charts in Addendum 2 at the bottom of the post to find out!


One of the new blogs I’ve been enjoying of late has been the site of a lively debate on investing for dividends.  Dividend Mantra presents a guest post there on his Dividend Growth Investing approach.  Blog reader Dan, in turn, makes some very astute observations.

I, of course, joined in.  You can follow it all here:


While you’re there it’s worth checking out Mr. Money Mustache’s other offerings.

My last post there gives my view:

(Note:  well my intention was to also post this over there but it seems Mr. MM has closed the comments on that entry.  Ah well, at least I got this blog post out of it. :))

Dividend Mantra, Dan….

Thanks for the lively debate.  For those readers with some basic knowledge it has been  fun to sift thru the conversation.  However, for those who are new to this whole investing thing, they are likely more confused than ever with the conflicting claims.

At the risk of stirring up the dust again, I believe it is important that beginning investors be very clear on what is accurate information here.

Basically Dan makes three key points:

  1. With vanishingly rare exception Index Investing bests all other methods.
  2. Receiving dividends in a taxable account is a taxable event.
  3. The payment of dividends represents a reduction in the company’s value that precisely matches the amount paid.

In each of these he is absolutely correct.

1. With vanishingly rare exception Index Investing bests all other methods.

Far and away this is the most important point.  You can’t consistently pick winning stocks. I can’t either.  The vast majority of pros can’t.  Warren Buffet has, but suggesting that his act is easy or even possible to follow is simply wrong and dangerous.

Here’s my take on why:

Why I can’t pick winning stocks and you can’t either

Here’s my take on what works:

What we own and why we own it

Dan said:  “I strongly believe the research of the last 40 years has shown that any benefit achieved through active stock research and picking is due to sheer luck – not due to any true ability on the part of the stock picker.”

This is not just what you believe, Dan, it is absolute fact.  The research is stunningly clear and precise on this.

2. Receiving dividends in a taxable account is a taxable event.

Every penny of dividends you receive in a taxable account is subject to tax in the year you receive them.  If you believe this not to be true simply don’t report them on your 1040 this year.  You will shortly receive a private invitation from the IRS to explain your error in detail.

The good news is, for those in the 15% or lower tax brackets, qualified dividends are taxed at 0%.  But for those in the 25% and higher brackets, money will be owed.

You may not share Dan’s concern with paying these taxes or be interested in the ideas he offers to gain more control over how and when you pay taxes on your investment gains.  Indeed it is my opinion that taxes are not necessarily the first consideration in investment strategy.  But if you hold in taxable accounts investments in companies that pay dividends you will give up a portion of those to your Uncle Sam.

This is an absolute fact.

3. The payment of dividends represents a reduction in the company’s value that precisely matches the amount paid.

This, too, is an absolute fact and I think Dan did a sound job of explaining it.  Indeed I have been puzzling over why people seem to be stubbing their toe on it.  Perhaps it is simply a bit counter intuitive.  Let me take a stab at clarifying it a bit.  Maybe Newton’s Law of Gravity can help.

As we all know, Newton was the first to describe (not discover: it was always there) gravity and its principles.   In short, any object with mass exerts an attractive force on other objects of mass.  The strength of that force is directly proportional to the mass of the object.

In the classic story an apple falling to the earth illustrates gravity in obvious action.  What might be less obvious is that the apple exerts gravitational force as well as the earth, just on a far smaller scale due to its far smaller mass.

So if, as Newton’s law claims, apples have gravity why aren’t two apples sitting on a flat table drawn together?   Two reasons.  One, gravity is a very weak force.  (Consider the entire gravitational force of the planet isn’t strong enough to pull an apple from the tree until it is fully ripe and the tree releases it.)  Two, there are other, stronger, forces at work on the apples.  The friction of the table surface.  The resistance of the air between the apples.  The much larger earth’s gravity trying to pull them down thru the table.

With that in mind, let’s take a look at KO (Coke Cola) and the example of its dividend, letting KO represent the Earth and its dividend the apple.

Like the Earth, KO is huge:  159Billion in market cap, 171B in Enterprise Value, 46B in annual sales.

Like the apple, KO’s dividend is relatively small.  At .47 per share paid to 2.27B shareholders it is just over one billion dollars.  That is real money leaving the company and that lost value is precisely the same as the dividend itself.  However, just like the gravity of an apple is hard to perceive in the shadow of the earth, so too it can be easy to miss the lost value to KO of the paid dividend against the scale of the company itself.  But the loss is no less real for it.

This is why traders pay close attention to the ex-dividend date (this is the date that determines who gets the dividend if the stock is being sold.  Before it the div goes to the buyer, after to the seller.  BTW, this is not the day the div is paid.) of stocks.  The value of the stock will be affected by precisely the amount of the dividend paid.

From Jordan in the comments below, an ex-dividend date illustration:

Example: Ex-Div date is 10 Jan.

Buyer buys BEFORE 10 Jan and the Buyer WILL receive the Dividend.

Buyer buys ON or AFTER 10 Jan and they WILL NOT receive a dividend (because the rights to it already went to the seller as the owner of record).

The Ex-Dividend date is the first date that the security trades without the rights to the declared dividend.

But wait!  If this is true, how come sometimes a stock price will rise on the ex-div date?  Or maybe fall even further than the dividend would call for?  For the same reason two apples on a table aren’t drawn together.  It’s not that Newton was wrong, it is that other, stronger forces are at work.

In the case of stocks those forces are largely traders working with many variables, only one of which is the dividend payout.

Like everything else in life, there is no “free lunch” when it comes to dividends.  When KO pays out that billion dollars in dividends, that is a billion dollars that is gone forever.  It is a billion dollars they could have used otherwise.  Could they have wasted it?  Of course.  Or they might have deployed it to great advantage creating more value per share than the .47 they paid out.

Basically there are four things (at least that I can think of off the top of my head) that companies can do with their profits.  They can pay them out as dividends.  They can use them to build the company.  They can buy back their own shares.  They can buy other compaies. They can sit on them waiting for opportunities.   See I came up with a fifth!

Which is best?  Depends.  On the management.  On the company.  On the industry.  On the economy.  To name a few.  But none are magic.

Those are the facts.

So, what about Dividend Mantra’s Dividend Growth Investing approach?  I think he hits the value it offers best when he says:

“I live in a different world-the real world. Where stock prices move up and down, are at times overvalued and undervalued, sometimes react stronger to dividend payouts and sometimes completely ignore dividend payouts. This is a world where a company can grow earnings by 100% and see the stock price stay flat, where the stock price can go up and down by 10% or more for no apparent reasons. It’s because of these drastic up and down gyrations in my world that I invest in dividend growth stocks. The extreme gyrations do not affect my steadily rising dividend checks. It will, however, affect people who sell shares for income. They’ll have to sell more or less shares to net a desired dollar amount depending on the day, and they are completely subject to the crazy market that operates in my world.”

In other words, it provides a smoother ride.  As far as it goes, this is true.  Companies that pay dividends tend to be larger, more stable operations.  Management is loath to declare dividends and then have to pull them back.  Although, make no mistake, this can and does happen and the crash of 2008 was filled with companies forced to cut or eliminate their dividends.

The price you pay is lower potential growth.

Some observations:

  1. These same large stable companies tend to grow at a slower pace.
  2.   You will pay taxes on those dividends.
  3.   If you implement this approach with individual stocks you take on all problems of point #1 above.  This is easier and safer:  https://personal.vanguard.com/us/funds/snapshot?FundId=0602&FundIntExt=INT
  4. Or this:  https://personal.vanguard.com/us/funds/snapshot?FundId=0623&FundIntExt=INT
  5. Focusing on dividends is trading growth for income.

As I mentioned elsewhere in this blog, while I am a firm believer in indexing I haven’t entirely given up on trying to outperform with a few individual stocks.  As I’ve said, I’m a slow learner.

Actually, this year my efforts have done pretty well.  You might be interested to know that this was due to a focus on high-dividend stocks.  I also had a nicely profitable short term Netflix trade, but that’s an outlier.

As is typical after a crash, since 2008 growth stocks have been shunned and value (dividend) stocks have been the stars.  I’ve been riding that wave.  I’ve even been doing it in my (sorry Dan :)) taxable account.  I wanted the tax loss if it had gone against me.

But the wheel, as it always does, continues to turn.  Value will fade and growth will rise again.  Over time, as the research shows, the difference in return between them negligible.

If you’ve read this far you know I think there are better choices.  But if the dividend approach is comfortable for you and you go in with your eyes open and willing to accept the downsides, it can get you where you want to be.

But do yourself a favor. Track and measure your performance against an index fund like VTSAX. If you are going to all the effort picking individual stocks (dividend or otherwise) it only makes sense to see if it is paying off for you.

Far more important:  Spend less than you earn, invest the surplus and avoid debt.


Addendum 1: 

From the always entertaining and insightful Go Curry Cracker…

Fewer Dividends, please


How do I live off just dividends?

Addendum 2: 

Chart 1: $10,000 investment in Coca Cola (KO) in December 2011 with dividends reinvested

Stock Chart

Total Value: $23,961/33

Chart 2: $10,000 investment in Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) in December 2011 with dividends reinvested


Total value: $37,997

Important Resources:

  • Vanguard.com
  • Empower* is a great free tool to manage and evaluate the investments you have, including costs. At a glance you’ll see what’s working and what you might want to change. Very cool.
  • Betterment* is my recommendation for hands-off investors who prefer a DIFM (Do It For Me) approach. It is also a great tool for reaching short-term savings goals. Here is my Betterment Review
  • Tuft & Needle* helps me sleep at night. A very cool company and a great product.

*These are affiliate links and should you chose to do business with them, this blog will earn a small commission.

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Important Resources

  • Talent Stacker is a resource that I learned about through my work with Jonathan and Brad at ChooseFI, and first heard about Salesforce as a career option in an episode where they featured Bradley Rice on the Podcast. In that episode, Bradley shared how he reached FI quickly thanks to his huge paychecks and discipline in keeping his expenses low. Jonathan teamed up with Bradley to build Talent Stacker, and they have helped more than 1,000 students from all walks of life complete the program and land jobs like clockwork, earning double or even triple their old salaries using a Salesforce certification to break into a no-code tech career.
  • Credit Cards are like chain saws. Incredibly useful. Incredibly dangerous. Resolve to pay in full each month and never carry a balance. Do that and they can be great tools. Here are some of the very best for travel hacking, cash back and small business rewards.
  • Empower is a free tool to manage and evaluate your investments. With great visuals you can track your net worth, asset allocation, and portfolio performance, including costs. At a glance you'll see what's working and what you might want to change. Here's my full review.
  • Betterment is my recommendation for hands-off investors who prefer a DIFM (Do It For Me) approach. It is also a great tool for reaching short-term savings goals. Here is my Betterment Review
  • NewRetirement offers cool tools to help guide you in answering the question: Do I have enough money to retire? And getting started is free. Sign up and you will be offered two paths into their retirement planner. I was also on their podcast and you can check that out here:Video version, Podcast version.
  • Tuft & Needle (T&N) helps me sleep at night. They are a very cool company with a great product. Here’s my review of what we are currently sleeping on: Our Walnut Frame and Mint Mattress.
  • Vanguard.com


  1. Shilpan says

    Stock price always reflects company’s ability to grow earnings per share. If you go back 50 plus years, you will see that stocks that have outperformed the market have always had spectacular earnings growth. So, one can pick a winner — at least until growth slows. 🙂

    You have a great blog. Keep it up!

      • Reido says

        I got caught by this little “after thought” when I bought SUN microsystems in 1998 because its earnings had been growing immensely and obviously would continue to grow… Oops…

        Good luck to you and I hope you have better luck than I did!

  2. Dividend King says

    I would just like to follow up on the whole dividend growth idea. I too am a dividend growth investor and will be an index investor, but I have different goals for each. For my DG portfolio I seek income growth from my assets to one day exceed my expenses, I am not looking for the 10% or so average annual return provided by the market. This will help me to reach my goals of early retirement and because I plan to retire, or not have to work for money, before the age of 59.5 I keep these securities in a taxable account. When I start my first “real job”, as I’m still in college, I’ll use index investing for my 401k and Roth IRA contributions as they focus on growing my asset base without the unsystematic risk of individual securities. DG investing helps an investor receive income from their investments without having to sell shares whereas index investing investors would be required to sell off their shares in a fund if they require more income than the current yield.

  3. Krishanu says

    Mr. Collins,

    If one were to go ahead with either VDAIX or VHDYX (the two links you’ve given above), which one would you suggest is the better option?

    These are the differences (or “sameness”) I could find:

    ER – 0.20% for both
    Price – $28.89 for VDAIX and $23.82 for VHDYX [pretty close; but shouldn’t matter?]
    Asset class – both US stocks
    Returns since inception – 6.59% for VDAIX and 4.96% for VHDYX [see an advantage here]
    # of stocks – 146 for VDAIX and 390 for VHDYX [does this make the latter “safer” because of the broader base?]


    • jlcollinsnh says

      Hi Krishanu….

      With the caveat that I’m not a dividend investor and wouldn’t invest my money in that fashion….

      Given that choice I’d go with VHDYX simply because the dividend yield is 3.01% v. 2.01% and if you are going to do this, yield is the point.

      But that said, let’s explore your points further:

      —ER – 0.20% for both.
      So, a non-issue, but 4x the ER of VTSAX.

      —Price – $28.89 for VDAIX and $23.82 for VHDYX [pretty close; but shouldn’t matter?]
      The price of shares is meaningless. It is simply based on the number of shares outstanding divided into the value of the assets on any given day. So, as you’ve guessed, this doesn’t matter.

      —Asset class – both US stocks.
      The same and so another non-issue.

      —Returns since inception – 6.59% for VDAIX and 4.96% for VHDYX [see an advantage here]
      Now this is the interesting one, and it makes my point in the post above. The best returns come from the lower yielding fund. This is because VDAIX looks at factors beyond yield. Once you do that, you find better returns and the key reason dividend investing falls short.
      Now consider that VTSAX yields 1.97%, within spitting distance of the 2.01% or VDAIX. Plus VTSAX has soundly outperformed over the last five years:

      —# of stocks – 146 for VDAIX and 390 for VHDYX [does this make the latter “safer” because of the broader base?]
      Yep. And VTSAX with over 3000 has an even broader base.

      Make sense?

      • Krishanu says

        Makes absolute sense!

        No arguments over VTSAX, I was just curious. When I started reading this post, I went over to Vanguard and was playing around to find how many dividend index funds they have. VDAIX and VHDYX are the two I found, and was lo and behold, you mention these two very funds later in your post! I was pleasantly surprised.

      • Fab says

        Hi Jim, Hi Krishanu,

        At first, I want to give huge thanks to Jim. Sincerely. I am reading (and almost done) your book. Now reading your blog… This is awesome. I think your daughter have been lucky getting these wise advices growing up. And so we are, as you are sharing it.

        I’ve studied finance and start my career with that. To finally (and quickly) turn an entrepreneur because all those things were a big lack of sense, to me. But also because freedom is the most important thing you can get. You’ve explained everything so right and get me back on board with investing, for the F-You money. I was not far, but a bit lost and disappointed with the disinformation and wanted\made up complexity of the market. Hat off to you Sir.

        That being said, let’s do this!

        I am 33, french living in Canada right now, running my business, doing my homework according to The Simple path to Wealth advice. And getting ready.

        I was also wondering about hight dividends funds from Vanguard, just like Krishanu. I think I got the whole point you explained.

        Maybe such a dividend fund, from Vanguard, with let’s say the most frequent distribution (monthly instead of quarterly) could be great for people who want to get an income from it. So it’s not my stage at this time, but could be considered maybe as intermediate (still aggressive as you are on stocks but more conservative) for people having accumulated and want to try to capture a better return than the fixed income can offer. But of course you still have the tax thing. Depends how you are comfortable with it I guess. If you have a sec, I’d love to know what you think about this.

        Fun fact: the last book I’ve read before yours is “Sapiens a brief history of humankind” 😉

        Well, thanks to you guys, very appreciated everything here.

        All the best,


        ps: I manage a blog as well (just starting up, in French, about conscience growth) and will definitely speak about you Jim and your great book.

  4. Stephen says

    I stumbled on dividend mantra through the MoneyPlan SOS podcast (which I stumbled on trying to find something to supplement the planet money and freakonomics podcasts).

    Anyways, after perusing his site I was curious and was hoping to get more information from someone I trusted. So I came over here and searched your site for dividend mantra and was pleasantly surprised to see you had written an article evaluating his post at MMM (which incidentally is where I found your stock series a couple months ago).

    Well after all that useless backstory I guess it’s time to get to the point. I’m a big fan of the arguments you made in the stock series and have almost everything in VTI and plan to leave it there for a good long while (I turn 30 in April). My question was whether this dividend growth investing strategy might be worthwhile in later years when I’m balancing growth with preservation. I recall your discussion of mixing stocks, bonds, and REITs at that time but was just curious if this might also have a place as it “offers a smoother ride”

    • jlcollinsnh says

      Hi Stephen…

      Welcome, and thanks for the kind words. Glad you found your way over here.

      Nope. The drawbacks to the DGI approach remain regardless of when you might implement it:

      1. Stock picking is inherently a losing strategy.
      2. Dividend stocks represent one narrow type of company.
      3. Like any stock picking strategy, DGI requires lots of time and effort, only to be…
      4. …constantly outperformed by simple indexing.

      Dividend Mantra, who by the way I consider a friend, loves researching and analyzing his stock picks. While I applaud doing things one loves in this case, because of the under performance, it becomes a very expensive indulgence.

      For anybody who enjoys analyzing and choosing stocks, as I did at one time, my advice would be to set aside 5-10% of your money for this and go ahead and indulge.

      But leave the heavy lifting of wealth building to index funds.

      • Dividend Growth Investor says

        Hi James,

        I disagree that dividend growth investing leads to underperformance relative to say S&P 500. If you look at dividend growth etfs like VIG, you can see fairly similar TR’s. Actually, the data disagrees with your assumption that dividend growth investing leads to underperformance.

        Actually, if you look at the performance of Dividend Aristocrats over the past quarter century, they have eaten S&P 500’s lunch during that time period.

        A lot of dividend growth stock portfolios are diversified with exposure to variety of sectors. And no, I do not think you need thousands of stocks to be “diversified”. If you hold 60 – 90 companies, representative of as many industries that make sense, you should be fine. (or you can say I am creating my own index, which I would call my dividend portfolio)

        When I looked at Dow 30 ( a list of 30 leading blue chips that is selected by a committee from Dow Jones), S&P 500 ( a list of 500 blue chips that is selected by a committee from Standard & Poors) and VTI since 1992, I found out that these three indices performed fairly similarly. So you do not really need thousands of stocks to generate returns.

        Actually, the nice thing of DGI is that you can essentially buy a collection of stocks, and pay a one time fee and be done with investment costs. An index fund will always cost something.

        The other nice thing, is that if you are really patient, and just hold on to your stocks through thick or thin, you may end up doing better than say S&P 500 over time, because the latter has component changes very frequently. Plus, the formula for index inclusion is changed fairly often changed. You may want to study the original S&P 500 companies performance or the Corporate Leaders Trust.

        As for taxes, in the accumulation phase, you will pay taxes. But you can put the investments in tax-deferred vehicles like Roth IRA for example. If you invest with index funds in a taxable account, you will have costs each year if you do rebalancing for example.

  5. Betty says

    I read this post when it was first published. I enjoyed it then and,
    again today. 🙂

    I needed a refresher course. 🙂

    • jlcollinsnh says

      Thanks Betty…

      I have to say it is wonderful to hear folks say they find the posts here useful and interesting enough to read more than once. 🙂

  6. Even Steven says

    This feels like a what’s first the chicken or the egg type of question. It’s like paying off a mortgage while not everyone agrees, it sure does make the person happy who pays it off and gives investors out there reason to say you are crazy for such actions.

    I think the reason many use dividends as their financial independence goal is it is entirely passive and provides a pretty strict number to keep track of regardless of the price of the share. If I have 100 shares of Coke, I will get $47, versus the investory saying if I have 100 shares of Non-Dividend Paying Coke(example only), that you will need $500K or $600K, which makes the number more of a moving target especially in down swings.

  7. Chris says

    Wow — that MMM post — It’s rare to see such a coherent takedown of an idea in the comments section. Dan (whoever he is) is clearly on top of his game. Kudos. I’d really like to see more of his writings.

  8. TheMoneyMine says

    Jim – I realize this is an old post but still a very relevant one.
    I had some doubts on Dividend investing and I am glad I came across your post to read a detailed analysis (as always) backing up your opinion. Dividend investing to me is best summarized by one of your points, “It is trading income for growth”.
    I can see the interest in a ‘retired’ situation to generate passive income, but I can’t think this would be more efficient than selling shares when cash is needed. Of course it does make it easier to generate a stable and ‘hands-off’ passive income, which is an appealing characteristic.
    Very informative post, thank you sir.

    • jlcollinsnh says

      Thanks TMM!

      This is an old one, but it still pulls a lot of traffic. So many are out there touting dividend investing, some folks seem to appreciate having a counter point.

  9. Syed says

    Glad I stumbled across this post. I currently invest my entire Roth IRA in VTSAX, but was considering investing into the high yield dividend fund at Vanguard. I also enjoyed reading Dividend Mantras website, before he recently sold it of course.

    Stock picking and analyzing is not my idea of fun, but it doesn’t bore me to tears either. I think I will focus on growth and stick with VTSAX (which has a decent 2% dividend anyway!)

    But the bottom line is (and which was literally your bottom line in the post): Focus on saving more than you earn and avoid debt. That is the biggest problem Americans face nowadays.

    • jlcollinsnh says

      Whatever happened to DM?

      Seems he just stepped away from his site and it’s now run by some group…

      • Xanimal says

        Dividend Mantra (aka Jason Fieber) did sell his site but you can still read his articles on his new site mrfreeat33.com. You can always catch up with him on his twitter handle too.

  10. Smart Money MD says

    Great summary. I think I’ve come back to this post at least four times over the past few years, mostly to remind myself of the arguments around this topic when my colleagues rave about dividend investing.

    Trading income now for growth later. Brilliant.

  11. Patrick says

    My two cents:

    The proposal behind dividend growth investing is that you can accomplish a higher yield while realizing higher income growth. This is based on past stock performance and dividend increases. Unfortunately this is just as inaccurate as assuming you can pick growth stocks accurately: we can’t predict future earnings accurately. No one can. Thus, past dividend growth is nothing but an illusion – the only thing you know is that management of that company is willing to sacrifice future growth to maintain a dividend (see Exxon and chevron during current oil bust).

    For laughs: the SP500 sees consistent dividend growth and it’s been around 5-6% per year for the past few decades. All you need to do to have a steady and growing income is invest in an index fund! Easier, better returns, and accomplishes all the same objectives.

  12. Christian says

    Small bit of information you are missing in your article (which I enjoyed by the way):

    Dividends are NOT always taxable. If you fall in the 10% or 15% tax bracket, you pay NO tax on your dividend. This is an important fact to mention and can be very advantageous…especially for those that retire early like many of your readers. When you retire early, your income is more likely to in that lower tax bracket and tax free dividends may be something that someone could/should make part of their portfolio.

    so to say that dividends are always and absolutely taxable is simple not true. Thanks!

  13. A A Ron says

    One, I just finished reading The Simple Path to Wealth and am about to reread it. I have already updated some of my investment allotments with Vanguard to lower expense ratio ones. Thanks!!!!

    Two, In clicking around between your blog and Mr. Money Mustache I clicked on a link to a dividend reinvestment site. You could plug in a stock, a stock price start date (say 01/01/2013) and then it would tell you how much that investment would be at another date (say 08/01/2016). I clicked on that link a few weeks ago and cannot remember the site name now at all. It was nicely laid out. Suggestions on a website that does that same calculations?

  14. Dividend Growth Investor says

    Not sure why I am looking at this 5 years later. But here is my take (in addition to what I posted above).

    A company that has increased dividends every year for at least a decade is most likely a company that generates too much cashflow, possibly because it has unique competitive advantages. This is the types of companies I analyze, and try to acquire at attractive valuations. It is subjective and does not fit into a neat formula.

    But I have done pretty well in the past 8 – 9 years with dividend growth investing. I believe that 80% – 90% of people should index ( preferably in a 401K account where they cannot touch too many things), because most investors do not have discipline, they cannot think independently, they do not have a desire to learn about business, and because they are busy. Plus, people are impatient, and want instant gratification. This is why I think that people should index in a 401K, where they cannot do too much trading. People get greedy or fearful, which is a problem that even indexing will never fix.

    Dividends do not reduce the VALUE of your investment ( I am not saying that ex-dividends thing you described does not exist with that statement however). Let’s assume that Coca Cola earned $2/share, and needed $1 to reinvest in the business, and distribute $1 to shareholders. The value of the business to a private owner is essentially a multiple of the earnings power. Cash on hand may also be helpful too, but you have to realize that easily accessible cash could trick executives into doing silly things like award themselves bonuses, build empires, etc. Plus, if that cash is not invested wisely, it is essentially a wasted resource. Management will find a way to squander it.

    A company can do three things with cash. 1) Reinvest 2) Distribute to shareholders 3) Keep on Balance Sheet

    The company will only reinvest the cash if it has a project that meets a certain ROI. If Coca-Cola just mindlessly reinvests all money, without taking into account profitability and likelihood of profitability for new money, it is essentially wasting shareholder resources. You also have to take into account competition, and expertise too. I don’t want them branching out into unrelated businesses, which could hurt profits because very few managements have been able to diversify into unrelated businesses without really messing things up.

    Coca-Cola is so large, that it doesn’t really need all of its money in order to grow, do research, expand operations etc.

    Coca-Cola could also keep that money and accumulate it on the balance sheet. That money doesn’t create a lot of value to shareholders, if it just sits in a bank account ( or in this case US Treasuries). Also, a little known fact is that the IRS doesn’t like companies to just accumulate too much cash, and may actually tax it, if the company does not have stated some use of it.

    Coca-Cola generates more cash than what it needs.(wish I had this problem)
    So Coca-Cola sends this excess cash to shareholders.

    In fact, it has been able to generate excess cash for decades, which is why it increased dividends each year for over half a century ( and delivered awesome total returns as well).

    Other interesting Dividend Growth Companies include Altria ( which has been the best performing stock in the S&P 500 between 1957 to 2003, despite the fact that it paid and increased dividends regularly during that period), as well as Wal-Mart ( which also grew dividends and delivered outstanding returns over time)

    • Dividend Growth Investor says

      To add a small thing – few companies can afford to reinvest all earnings back at high rates of return. You have laws of diminishing returns for example. Plus, it is possible that these companies need to reinvest all the money, or else they will face obsolescence or their products will become irrelevant. There are outstanding capital allocators like Buffett that have been able to reinvest all excess cash flows (which are essentially dividends paid by subsidiaries) at high rates of return by expanding to a lot of industries. But unfortunately, there is just one Buffett ( and perhaps a few other skilled capital allocators), but over 100 dividend champions (companies that raised dividends every year for a quarter of a century) and over 200 – 300 dividend achievers ( companies that raised dividends every year for a decade)

      Most successful dividend growth stocks have come from industries with little change over time (consumer staples, healthcare). Change is usually bad for investors, so I do not like creative destruction.

      Sorry to be posting so many comments

      • Jordan says

        I’m sorry, but for the sake of clarity to other readers, I think MJR is correct (Example below). Really enjoy the blog by the way, I find it incredibly inspiring. The posts and especially the comments section are always thought provoking. Keep up the great work!

        Example: Ex-Div date is 10 Jan.

        Buyer buys BEFORE 10 Jan and the Buyer WILL receive the Dividend.

        Buyer buys ON or AFTER 10 Jan and they WILL NOT receive a dividend (because the rights to it already went to the seller as the owner of record).

        The Ex-Dividend date is the first date that the security trades without the rights to the declared dividend.

        Despite this example, I wholeheartedly agree with the post’s assertion that index or whole-market investing outpaces dividends over long periods. Great breakdown


      • jlcollinsnh says


        You are, of course, absolutely correct Jordan; as was mjr above.

        Great explanation and illustration. Along with correcting my error, I’ve included your illustration in the post.

        My thanks to you and mjr for pointing this out. I always appreciate readers like you both who provide such fact-checking.

        And with my thanks, my sincere apologies, to mjr. You were right, and I was wrong.

  15. dje says

    VTSMX is an example of a good dividend growth vehicle. The weighting method insures that the majority of the stocks owned are very large dividend paying stocks. Looking at the dividend growth rate of the S&P 500, which makes up a large percentage of VTSMX, I found the dividends growing almost 8 percent per year from 2010 to the present. The dividend yield of VTSMX is almost 2%, which is excellent. Combine this with a very low expense rate and the simplicity of investing in one fund, and it is a fine choice for long term investing for anyone, including dividend growth investors.

  16. snarlyjack says


    I love your stock series…thank you!

    I went on Vanguards site (view chart) & compared 3 charts.
    The Total Stock Market, The S & P 500 & High Dividend Yield Index Fund.

    All 3 charts are within hairs of each other. All 3 funds are different
    from each other. The Total Stock market has 3600 companies, The
    S & P 500 has 510 companies, The High Dividend Yield Fund has
    420 companies. The main difference between these 3 funds is the
    High Dividend Yield Fund has the largest 420 paying companies
    (Big Blue Chip Stocks) where the other 2 funds have smaller non paying
    dividend companies. I think the High Dividend Yield Index Fund
    compounds out faster because of it’s large dividend. Plus you could
    live on the dividend of 3.5% without liquidating any shares.

    Thank you for a great stock series & please post up more articles!

  17. Renee says

    With respect to KO, you should also consider stock splits. Husband bought KO long ago, it had split several times, so dividend income has grown as well. Acquisitions and spin-offs happen as well as reverse splits, so he considered dividend stocks as the gift that keeps on giving in spite of some failures.

    • jlcollinsnh says

      Actually, no.

      Stock splits don’t provide shareholder value. They are done as a marketing gimmick because companies know unsophisticated investors prefer lower priced shares as for any given amount invested they get more shares.

      If a stock trading at $1000 a share splits 20 to 1, you now have 20 shares @$50 per share, which equals $1000. But one share at $1000 is precisely the same as 20 at $50.

      Companies also know that investors tend to avoid “penny” stocks and so if their shares drop below a dollar a share they will sometimes “reverse spilt”. Reverse split a 10 cent stock 20 to 1 and you magically have one $2.00 per share stock. But, again, no shareholder value is created.

      Splits also have no bearing on dividend payouts. If your $1000 per share stock was paying a 5% dividend, $50, your newly spilt 20 $50 shares are still paying 5%: $2.50 per share, $50 total.

      Warren Buffett has never split BRK-A, which is why it trades at $280,470 per share as of today’s close. Few would complain that it has not returned value to shareholders over these last decades.

  18. randomax says

    recently started on the adventurous path to FI and have been reading through the stock series. I am kicking myself for not having stumbled upon your site earlier! You are the Gandalf for this Bilbo! 🙂

    Now for the question: “VTSAX yields 1.97%”
    I have started investing into VTSAX in all of my taxable funds as I am in the wealth-accumulation phase. For the tax-advantaged, my 401k does not offer Vanguard funds, but I am choosing a similar total market fund from Schwab.

    I have configured the dividends to be automatically reinvested – I figured dividends can be treated as secondary income stream and I should invest them the same way as I do with my primary income.

    Can you talk about the general strategy wrt dividends from VTSAX in the taxable accounts? Is there anything else I can do (other than accumulate it for a period of time and then invest – what does that even buy)?

    Thanks a lot for what you do!

    • jlcollinsnh says

      Gandalf, eh? (stroking my long white beard)

      Well, Bilbo…

      For funds or stocks held in a taxable account, the dividends are taxed in the year they are earned regardless of whether you chose to reinvest them or take them as cash.

      For those in the Wealth Accumulation stage, reinvesting them to further build your holdings makes the most sense.

      Once you are drawing on the portfolio in the Wealth Preservation stage, you can take them as cash to help meet your spending needs.

      In either case, on your journey be careful of the Orcs.

  19. Jenna says

    I actually have two portfolios, one is DGI and another pure indexing and DGI total return is doing better than Indexing (VTI) it after 3 years.

  20. Starbuck says

    Have just started reading your blog . Loved your book.
    I guess you know by now that you have gone worldwide 🙂 and that dividend investing is very different in Australia.
    30% franking credits thank you very much 🙂
    Looking forward to reading the rest of your blog

  21. Cam says

    I can live off the dividends of my index fund. Does that make me a dividend investor?

    I read somewhere that you think living on 2% of a stock index portfolio would be the safest of all.

    Do you still hold that belief?

    • jlcollinsnh says

      You can identify yourself as any kind of investor you please, but typically “dividend investors” seek out companies that pay dividends and exclude others. Since a broad based stock index fund holds companies of all kinds, most would not consider that a dividend investing strategy.

      That said, if you own a broad-based stock index fund and spend only the dividend from it, you have a very safe approach.

  22. Mike says

    Hi. Just finished your book. Great stuff and now starting to implement the changes needed based upon your recommendations.

    While I understand VTSAX and VBTLX seem to have dividend yields in the 2% range and that you do not recommend high-divided investing as a strategy, what do you think is the best fund oriented to high-dividend investing? You mention VDAIX in the comments above, but (as you pointed out) its yield is essentially the same as VTSAX’s, its performance is worse, and its ER is worse. So, kind of a weak point of comparison. Or, is this the best high dividend yield fund that you are aware of?


  23. Filip says

    Nice read!

    And I’d like to add, no matter what you prefer, it’s how you act.
    Growth reinvests its profits and that’s exactly what you should do with your dividends.

  24. Darin Klemchuk says

    A different take on this is to do index investing to hit your 4% number (or whatever rule you are using) and then add dividend growth investing in blue chip companies to create a reliable and recession-resistant income stream. Yes, you may lose performance by taking money out of index investing. But you also gain stability in the income stream. As long as that stream is stable and growing, the price of the stocks don’t matter since the dividends are the income stream (e.g., no market timing for selling the stock to create income).

    We are using dividend stocks, real estate (mainly Fundrise), and bonds to create three low-correlation income streams in addition to our index investing. We are blessed to be able to do that. Made the decision I didn’t want to suffer through occasional multi-year down periods (or save enough cash to ride out 2-3 years of not selling index investments) and was willing to take lower performance and/or more months of investing to get to FI. Of course, to each his own.

  25. Steve L says

    Thanks JL. People who invest want to make it a recondite task, Index investing is boring to them. The excitement and ‘thrill of the ride’ of single stocks brings brings it early (or not when it results in a loss – along with sleepless nights), while index investing is a ‘slow roll’ and seems too simple for the intelligent investor. However, the math, and more importantly the risk, does not lie. I get a call periodically from a nationally known investment group. I ask the caller if his managed individual investments can beat the S & P Index over aa 10 year period and the caller goes silent. Nope, I prefer the ‘cruise control’ method vs the stock picking method. I learned a long time ago that I am NOT Warren Buffett….. Thanks again.

  26. Jonathan says

    While everything written is true, nobody seems to address the question that if you sell shares to live off you’re making your net worth or nest egg smaller. Living off dividends that is not true. You’ll still have the same amount of shares and in a downtrend you won’t be stressed out and will be able to sleep well knowing your money will be there at the end of the month.
    I use both indexing and DGI 50/50 and while maybe indexing provides the best ROI, that’s not what matters to me in the first place…the important thing to me is keeping all my shares and still be able to pay my bills.

    • Jack says

      Hi Jonathan,

      Spending your investments is very much addressed in all the Safe Withdrawal Rate simulations as well as being the reason for Sequence of Returns risk. And I don’t get your logic that withdrawing dividends is not reducing your nest egg.

      • Jonathan says

        Anyone who follows closely the day a dividend is in (date ex) knows that although the price is indeed adjusted down, the price ends up most of the time closing way above the adjusted price. Paying a dividend is a a sign the company is doing well. I’m happy Biden is cracking down on buybacks.
        Anyway I’m not one to believe what people say. I’m testing it myself and so far I’m seeing better results and tranquility looking at my dgi portfolio instead of my indexing

        • Jack says

          Look at Berkshire stock price if you want to see what it looks like when dividends are not paid over time.

  27. Tom says

    My 2 bits worth; I do a combination. I have tlx and sax and put $$ in as that’s my retirement fund. Yes, I go against the grain of JLC and try more of a dca approach, but I don’t try and time the market. I do try and be wise about when I buy however. Divi’s are reinvested, period.
    Dividend stocks however, I do buy/sell. With an approach of fundamentals, yield on cost, longevity of increasing divi’s and other factors, (Aristocrats, Champions etc). These I view as my temporary income. I let some reinvest, others are for cash to be used to plow back into my tlx and sax. You can argue I’m double buying, but for me, it provides extra income for said retirement w/o breaking my wallet when I want to buy.
    (When sax is paying an average of .33 and my divi stocks are paying an average of .66, I can dump the cash into the money market, sweep other funds etc. Its just a way of increasing my buying power or rainy day fund.)
    I don’t want to deplete my funds in retirement by selling and want to pass on whatever I’ll have once I’m gone. The funds will provide enough for the bills, SS will pay for health (if gov’t doesn’t change it … good luck on that) and the remaining will be fun $$.
    That’s all I have to say to anyone on a social level….

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