Question: I saw online recently someone in the financial freedom community is planning to use a dividend strategy to cover their living expenses. Rather than withdraw 4% from their portfolio every year, they are creating a portfolio that pays out a 4% dividend yield. They claim with this strategy they never have to touch their principal and can live just off the income their portfolio creates. This seems to make sense to me but I also see a lot of finance creators push back on dividend strategies. Should I be trying to create a dividend yield with my portfolio?

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Answer:

The best marketers in the world are Apple, Nike, and... dividend investors.

I get the appeal of dividend investing. It feels like it's free money, it feels like it's protecting your "principal", it feels like it's baby birding little drops of income into your portfolio.

The problem is it stops there. At feelings. Until it's rudely interrupted by reality.

Quick definition of dividends - dividends are payments made by a company to it's shareholders. When you own shares of a company (whether you own them directly as stocks or indirectly in funds), you are a part owner in that company. When a company has earnings, they can choose to either reinvest those earnings back into the company or pay them out to you in a form of a dividend. More mature companies tend to pay out dividends while younger companies in a hyper-growth stage tend to reinvest them.

Some companies are great companies and they pay dividends. Some companies are great companies and they do not pay dividends.

Here is the gist - the dividend policy of the company does not tell you anything meaningful about the future performance of the company.

I've talked about the technical aspect of dividends a lot: here, here, and here. Today, I want to talk about the behavioral aspect.

The greatest (and maybe only) benefit of dividend investing is the psychological component.

The psychological benefit you receive from dividend investing is a feeling of comfort: a reliable (not guaranteed) dividend payout, not having to figure out where your income is coming from, and maybe the thrill of watching dividends deposited into your account.

Here's the thing - you can make your own dividend.

You can sell shares and it would be the same thing.

Dividends are not more special than appreciation: a stock increasing in price.

They're just a component of return. Total return = dividends + appreciation

The thing that most upsets about me about the dividend crowd is not their bad math, their misinterpretation of dividends, or their worship of them.

It's the time wasted.

If you really want to make more money, there are far superior ways like spending your time developing skills, starting a side hustle, or working toward a promotion.

If you are fine with the amount of money you have, spend your time doing literally anything else more enjoyable than tracking dividend paying stocks.

And if you are one of those rare individuals that does enjoy tracking stocks then fine. Track them.

But do not delude yourself.

Know the potential risks - don't be overly concentrated in any one stock. Be careful if you are in only in one asset class - a lot of dividend investors are only in US large cap and are missing out on small cap, international, emerging, etc. And do not confuse dividend yield with safe withdrawal rate (I talk about this in more detail in my above podcast episodes).

But if you are someone who is asking, "Is this something I need to worry about?"

Rest easy. The answer is no.

You do not need to analyze financial statements. You do not need to find the sharpe ratio. You do not need to compare earnings per share.

Leave that to the full time 40-60 hour a week professionals (who still can't beat the market).

Your time is a precious resource that should not be wasted on chasing dividends.

Here is my dividend approach in a nutshell:

I don't care. I don't think about them. I don't chase them. I don't avoid them. They do not occupy my mind outside of telling people why dividends don't matter.

🎙️ Becoming Work Optional

We are doing interviews on the podcast!

Recently, we had Liz Giorgi on and she shared with us how she built a business that gave her financial freedom in her 30's.

Liz is building a company called Soona, which has raised $53 million so far.

I took a lot from this episode and will be applying it to my own business. I think you'll take a lot from it too.

My favorite line from Liz in the episode "If a business can't pay you what you're worth, it's not a good business."

If you are 'work optional' or 'savings optional' (coastFI), and want to talk about your story on the podcast, apply to the show by emailing duncan@rachaelcampwealth.com

Let me know what you think of the podcast. I am putting a lot of my energy here and want to make sure it's great.

Liz episode:

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That’s all for now!