Is Dividend Investing A Good Strategy?
A dividend is simply a company sharing its profits with investors.
Coke pays $2.04 per share in dividends each year.
Apple pays $1 per share in dividends each year.
SCHD pays $0.99 per share in dividends each year.
VOO pays $7.24 per share in dividends each year.
QQQM pays $1.27 per share in dividends each year.
Palantir doesn't pay a dividend at all.
But why do some stocks pay higher dividends while others (like Palantir) don't pay dividends at all?
It all comes down to the company's growth stage.
For example, let's think of companies like people for a minute. Companies are going to handle their money differently depending on where they are in their life journey.
Younger companies (like Palantir) are similar to someone still early in their career.
They're more focused on pouring every dollar back into growing bigger and stronger.
Whereas mature companies (like Coca-Cola) are similar to someone who's already "made it." They've built their empire and can now enjoy the fruits of their labor.
Where Does the Profit Go?
When successful companies have extra cash, they have 3 main ways to deploy it that benefit investors:
They can reinvest it in the company for more growth. This can bring in more profit for its investors and increase the stock price or future dividends.
They can buy back their own shares. This decreases the number of stocks people can buy on the market which helps increase the stock price.
Or they can pay some of those profits directly to investors, AKA dividend payments.
(Fun fact: Companies often choose share buybacks instead of dividends because they're more tax friendly.)
Dividend Income or Stock Price Growth?
When I first started investing, I loved the idea of dividends. I'd calculate how much I'd need to invest in a dividend fund to replace a bill with dividends for fun. It felt easier to trust those numbers because the dividend payments were more predictable.
But even though those dividends felt more stable, I soon realized that most of the long-term gains in the stock market came from stock price growth. Not dividends.
And since I'm in wealth building mode, I decided I'd focus more on stock price growth rather than dividends alone.
It's similar to real estate in a way. Most of the money in real estate is made from the value of your house going up over years or decades. Monthly rental income payments are nice, but the big money is made when you actually sell the property at a massive profit down the road.
So how do you know what to prioritize right now? Here’s a simple cheat sheet to help you decide:
If you want regular cash payments now and don't want to take additional risk for more potential stock growth → Dividend stocks are your friend
If you want to maximize your wealth growth potential → Stock growth usually does that better
But the real magic? When you combine both.
Your shares becoming worth more AND reinvesting any dividends you get.
You don’t have to pick one route forever but understanding the difference helps you know what to prioritize right now.
The Dividend Trap Many Fall Into
Many new investors get too obsessed with chasing dividend payments.
Sure, getting stable payments from your stocks feels nice and more predictable. Especially when the market gets choppy.
But if you're in your 20s/30s/40s and in the early stages of building wealth, prioritizing dividends alone can leave serious money on the table over the course of your investing journey.
My recommendation? Focus on your total return (stock price growth + dividends) and just think of dividends as a nice bonus.
VOO for example (an S&P 500 index fund) pays a 1.34% dividend AND offers good stock price growth opportunity. That's another reason why I love VOO.
Over time, compounding stock growth can blow past fixed income from dividends alone.
Focusing on dividends is great if you already have millions and all you're looking for is steady cash flow from the markets.
But if you're still building wealth, obsessing over dividends alone can slow you down
The Upside of Dividends:
The big "selling point" for dividends is that they're more predictable and stable compared to stock price growth.
You know exactly how much money you're going to get for holding a dividend stock.
And if you implement the right dividend strategy, you can even focus on adding companies that have a reputation for continually increasing their dividends each year even during some of the nastiest market environments.
Dividend investing tends to gain popularity during bear markets and recessions for this exact reason.
Having some dividend stocks that pay stable payments while the market is plummeting can help emotionally offset some of the red in your portfolio.
The Downside of Dividends:
Most of the magic in the stock market comes from stock price growth.
The "catch" is stock price growth is more volatile and less predictable than dividend payments.
But for every $100 made in the stock market since 1930:
~$40 came from dividend payments
~$60 came from stock price growth
In addition to that, being paid dividends is considered a taxable event as they're paid. Even if you reinvest them.
And although dividend payments are more stable and can offer a nice "lifeboat" during market crashes or recessions, they can still be cut or halted at anytime for any reason.
According to Wall Street Journal, nearly 200 US companies stopped paying a dividend during the 2020 covid market crash.
So although dividend payments are more predictable when they're paid, they can also still get hit during market turbulence if the companies who are paying them run into trouble (just as stock price growth does).
Even if you're going after dividends, the magic still comes in reinvesting them:
Just like consistent investing increases your returns over time, reinvesting your dividend payments will also make you richer over time.
When you reinvest dividends, you get more stocks, which produces even more dividends and stock price growth down the road. In other words, compounded growth.
The only time it makes sense to take your dividend payments now is if you reach a point where you are ready to live off of your stocks and not worried about aggressively growing your portfolio (or if you can't stomach the volatility stock price growth requires.)
One easy way to reinvest your dividends is through a Dividend Reinvestment Plan (DRIP).
Most stock brokerages offer this (If yours doesn't in 2025, it's time to join one that does)
DRIP automatically reinvests your dividends in more shares without you having to do a thing.
It’s one of the easiest ways to build passive wealth on autopilot
If you're reading this you're clearly thinking differently than most. Now it’s time to start investing differently.
If this newsletter gave you any clarity, imagine what having an actual step-by-step system would do.
Money Mastery gives you the full system so you know what to invest in, how to do it consistently, and why it actually works. Tap here to learn more.
