Dividend V. Growth Investing

I have a confession to make. I bought a lottery ticket last weekend when the jackpot was over $1.5 billion. I knew I wasn’t going to win. I couldn’t help myself. I am embarrassed. Thank you for not laughing at me.

If you are on Finance Twitter (Finance X just doesn’t sound good), you would think dividends are the best thing since sliced bread.

Here’s the bottom line before I get too heated: “dividend hunting” is overrated and a poor way to analyze a company. When you compare annualized returns over a long period (10+ years), dividend ETFs lose against growth ETFs.

What are dividends? Dividends are payments given out to every shareholder of a company expressed by a percentage of the share price. Some companies are known for high dividend payments, and there are many ETFs that seek to maximize dividends. The money paid out in dividends is usually excess profit. Companies with smaller or no dividends typically reinvest excess profit back into the company to drive research and development or other forms of growth.

People love dividends because of the monthly/quarterly payments. If you are looking for fixed income, dividends can be a sizable component of a diverse portfolio. If you are investing for long term wealth accumulation, ‘dividend hunting’ doesn’t make a lot of sense…

The X accounts above love to talk about dividend growth. Well, let’s look at some numbers and see where the real growth is in the stock market.

The 10 Year Returns column takes into account the impact of the dividend payments. When you look at this chart, you should think “wait, the expense ratio is lower and the overall returns are better of growth ETFs? Why would anybody focus only on dividends?” Great question.

I think there is a big psychological component to it. If you reinvest your dividends, your payments will grow over time. It is really exciting to see those paychecks. True passive income. Also, if you are trying to get to true Financial Independence, you can stop reinvesting your dividends and live on the dividends. On the other hand, if you follow Mike’s letter and the 4% rule, you can do the same thing by selling a small percentage of your portfolio each year. Since the returns are better with growth stocks, you would hit your FI number sooner when focusing on growth and not dividends…

Let’s also talk about tax implications.

Dividends are either Ordinary or Qualified.

Ordinary dividends are taxed like regular income. Much higher than the capital gains tax rate. Ordinary dividends apply to certain stocks like most international companies, real estate investment trusts (REITs), and stocks that you’ve held for less than 60 days.

Qualified dividends are taxed at the capital gains rate and apply to most US companies that you’ve held for over 60 days.

You will pay taxes on your dividends even if you reinvest them. However, you will not be double taxed when you sell the new shares later in life. If you own dividend stocks in a tax advantaged account, you can avoid some if not all of the dividend taxes.

If you are buying a dividend ETF, you can google if the dividends will be qualified or not (SCHD holds qualified dividends).

So let’s get this straight:

1. Dividend ETFs returns are worse than Growth ETFs

2. Dividend ETFs have higher expense ratios

3. Dividend payments are taxable events

At the end of the day, I own some SCHD because it provides additional diversity. It is not anywhere near my biggest holding though because the small dopamine hit every quarter is nothing compared to the growth of SCHG or VOO. Whenever you find something in the finance world that is getting an insane amount of attention, there is probably a catch. Don’t get fooled with quarterly payments. Always look to the long term returns.

Call to Action

Next time you’re in your brokerage account, look for a “History” tab that will record all your previous transactions. You may have received some dividend payments without even realizing it!

What We’re Reading/Listening To:

News Podcast: Breaking Points with Krystal and Saager. I don’t know if I have recommended this news podcast before, but it is my favorite independent new source. They do a fantastic job of reporting news with a focus on US politics.

Debrief on Deck

Next week, Mike is going to talk about Social Security. Is it a Ponzi Scheme? A government conspiracy? Or an old, old wooden ship that was used during the civil war era? Tune in next week to find out!

As always, please reach out to us with any questions or comments you have. You can reply directly to this email or find us on social media (X (formerly Twitter) and Instagram).

Until then, stay the course.

Disclaimer