Dividend Income Report; The Good… and the Bad



I’m pretty sure you don’t solely read this blog if you are interested in dividend investing. Among your weekly reads, you probably include other great dividend blogs such as the ones I mention on my stock website resource page.


Have you noticed something very common?

Most bloggers report their monthly dividend income. I noticed throughout the years that many dividend investors focus on dividend income and not total return. For them, it doesn’t really matter if their capital grew or not during the past 12 months. What really matters is how much the portfolio generated in cash flow. It goes with the general dividend growth philosophy focusing on buying companies that will always increase their payments year after year no matter what happens. For example, if you bought Coca-Cola (KO) 50 years ago, your dividend payment doubled just about every 7 years during that period. Today, if you calculate your yield based on your purchase price, you will be amazed by how much this company is paying you.


Do you look at your monthly dividend income?

The idea of tracking your monthly income derived from your portfolio is not bad at all. This is one of many ways to make sure you are on track with your investing plan (you have one, don’t you?). For retirees, this is even more crucial since the quality of their retirement depends partially on how much they receive from their portfolio.

Tracking dividend payments allows you to compare from the previous year and make sure your dividend growth goal is reached. The whole purpose of buying a dividend stock is not only to receive the dividend payment, but an ever increasing distribution! This is why I don’t mind buying low yield dividend stocks such as Apple (AAPL) and Disney (DIS) since I know their payout will increase.

There is also a very good feeling linked with receiving money each month. It’s like having a second job but not really having to go to work each morning to earn your pay check. I can understand why people take pride in reporting their numbers and feel good about achieving dividend income milestones. But to be honest, I don’t track this number at all, and I am a dividend investor… what’s wrong with me?


Why I am less concerned about how much I received last month

If you read those dividend income reports around the web, you probably noticed that I never post such articles. I don’t even know how much I receive on a monthly basis in my investment account. All I know is that I invest my liquidity in an index fund and buy another position whenever I have enough money. Most of the time, I’m selling an existing position to buy a new one and simply add the cash received from the dividend with my new purchase. The money never sleeps as it is invested in the index fund in the meantime and I’m pretty happy with this strategy.

Instead of tracking my dividend income, I track my total return and the year-end dividend yield my portfolio generated. It saves me lots of time and calculations as I only look at this metric once a year, usually during the holidays on a morning while my wife is sleeping and the children are playing with their new toys.


From an investing perspective, I don’t understand the importance of tracking my dividend income.

I don’t mean to offend anybody, but I simply don’t understand why it matters. Most investors use their money to build a nest egg that will insure a comfortable retirement. You can call it financial independence or financial freedom instead of retirement; it all comes down to the same thing: totally or partially living off your investments. Therefore, what truly matters at the very moment you are about to withdraw money from your portfolio is how much is there and what yield it generates.

Personally, I would feel a lot more comfortable with $1,000,000 generating 3% in yield or $30,000 per year but the ability to grow versus a portfolio of $800,000 generating 5% or $40,000. The hard core dividend investor will tell me my $1M portfolio generates less in income and that I will have to take money out of my capital to keep up with a $40,000 income and the 800K will never have this problem. At first glance, this makes sense, but not when you dig further.

Assuming both portfolio values grow by 5% each year; then, the $1M portfolio grows by 50K per year while the 800K grows by 40K. Even if you have to pull money out of the $1M portfolio at the beginning to get to the same income, here’s what happened over the next 20 years:


As you can see, the $200K value difference at the beginning becomes almost 300K after 10 years and 450K in 20 years. This is why I think your total return is a lot more important than your dividend yield. I appreciate the fact that portfolio #2 will generate more money in dividends and this amount is less likely to be affected by a down market. However, after 10 years, once both portfolios will have endured a complete economic cycle, their total return will be around 5%. Of course, the best scenario would be to have a $1M portfolio generating a 5% dividend income but I often see that higher dividend yield show less growth and investors who focus on the dividend payment leave a lot on the portfolio value growth table.


yield versus growth


How tracking my total return helps me becoming a better investor

I like to track my total return and compare it to two different benchmarks. The first one is the stock market in general. Therefore, I look at both the TSX and S&P 500 to see if I outperformed them or not. This is not my most important benchmark as I’m well aware dividend stocks react differently than the overall market. Therefore, it’s only normal to not beat this benchmark every year.

This is why I use a second benchmark which is two dividend ETFs (VIG for my US stocks and XDV for my Canadian holdings). As a dividend investor; I have two options: build my own portfolio or buy a dividend ETF. The only good reason to spend time building my own portfolio is if I can beat the ETF. Because if I can’t, I am simply wasting time while I could have invested my money in a single ETF and earned better returns and probably better yield as well. This is why I track my return and compare them to a benchmark while I completely ignore my dividend income.

What about you? What do you track? Your dividend income or your return? Or both?


Disclaimer: I own shares of AAPL, DIS, KO

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