Dividend investing vs. total return

Dividend investing means living off the cash dividends your stocks pay; total-return investing means owning a diversified portfolio and selling shares as needed. Mathematically, a dollar of dividend and a dollar from selling shares are close to equivalent, so the choice is mostly about taxes, diversification and psychology.

The case for dividends

• Never selling. Many retirees find it easier to spend income than to sell assets, especially in a downturn.
• Steady and rising income. Companies like Coca-Cola, Procter & Gamble and Johnson & Johnson have raised their dividends for more than 50 consecutive years. Dividend payouts usually fall far less than share prices in a bear market.
• A discipline filter. A long record of growing dividends tends to signal a profitable, mature business.

The case for total return

• Dividends aren't free money. When a company pays a dividend, its share price drops by about the same amount. Your wealth is unchanged; you've just received part of it as cash.
• Taxes. In a taxable account, dividends are taxed every year whether you need the money or not. Selling shares only taxes the gain, not the whole amount, and you choose when.
• Diversification. High-yield portfolios concentrate in a few sectors such as utilities, energy, consumer staples and REITs, and skip most of the fastest-growing companies.
• Yield chasing. An unusually high yield often means the market expects a cut.

How much do you need to live on dividends?

At a 3% portfolio yield, $40,000 of annual income takes about $1.33 million, more than the $1 million the 4% rule suggests. At 2%, closer to the S&P 500's yield, it takes $2 million. Live-off-dividends plans usually need a bigger portfolio or a higher-yielding, less diversified one.

A middle path

Many FIRE investors hold a broad index fund for total return, take whatever dividends it pays, and sell shares to cover the rest. Others add a dividend-growth ETF such as SCHD or VIG to tilt toward income without picking individual stocks.

Browse the highest-yielding S&P 500 companies with their payout histories on the dividend stocks page, or project your future income with the dividend income calculator.