How to Start Investing in Dividend Stocks

How to Start Investing in Dividend StocksI love our dividend stock portfolio! Our dividend income is my favorite form of passive income because it is very passive. I don’t have to do much and the dividends will keep rolling in. I like having rental properties, too, but they are just more work. Today, I don’t have time to be a DIY landlord anymore. That’s why I invest in Real Estate Crowdfunding. I can benefit from real estate, but I don’t have to work with tenants. However, real estate crowdfunding is relatively new. I trust dividend stock more so most of our money is invested there. Today, we’ll go over how to start investing in dividend stocks, then we’ll share our dividend portfolio with you.

Why invest in dividend stocks?

Why should you invest in dividend stocks at all? Wouldn’t it be better to focus on growth instead of dividend? Well, focusing on growth never worked that well for me. It is difficult to predict which companies will keep growing. Growth stocks are expensive and if the company couldn’t fulfill its promises, your investment won’t do well. It’s stressful for me to keep checking the stock price every day. Also, I tend to sell too early when investing in growth stocks. I had Amazon, Netflix, and a number of other growth stocks. When they did well, I usually sold. I think investing in dividend stocks suits my temperament better. However, if you enjoy frequent tinkering with your stock portfolio, then a dividend portfolio might be too boring for you.

Here are the reasons why I like investing in dividend stocks.

  • Less volatility – Solid dividend stocks are more stable than growth stocks. Their stock prices don’t bounce around as much.
  • Predictable income – Dividend income is a relatively stable source of income. This is good when you’re retired. Dividend income is also taxed at a lower rate than your active income. We didn’t have to pay any tax on our dividend income in 2015 and 2016. However, we had more earned income since then and had to pay taxes on our dividend income. I’m not too worried about taxes right now.Once Mrs. RB40 retires, we should be in the bottom two tax brackets and our dividend income will be tax-free.
  • Long term investing – It’s easier to invest for the long term with dividend stocks. I don’t have to worry as much about how the stock will do in the future because these are solid companies. Our portfolio doesn’t churn much now.

All in all, dividend investing is less stressful and it should hold up better through a bear market. Dividend investing is like the turtle. It will keep chugging along slowly, but surely. This works well for us.

*Note – We invest in dividend stock with our taxable brokerage accounts. All of the money in our retirement accounts are invested in low cost index funds.

The Dividend Growth Strategy

The main strategy for our dividend portfolio is to invest in solid companies with good track records of raising their dividend. This way, our dividend income will grow every year even if we can’t add new money. We have been doing pretty well so far since we started following this strategy.

Prior to 2012, I didn’t really have a strategy. Most of the investment in our taxable account was in my old company stock and whatever stocks sounded good at the time. Switching to the dividend growth strategy made investing much less stressful and the income will come in very handy when Mrs. RB40 finally retires.

Here is our dividend income record since 2012.

  • 2012: $6,791
  • 2013: $8,036
  • 2014: $8,759
  • 2015: $10,695
  • 2016: $11,232
  • 2017: $12,601
  • 2018: $13,106
  • 2019: $14,897
  • 2020: projected $15,800

Actually, our 2020 dividend income should be a little higher than projected and hopefully surpass $16,000. The great thing about the dividend growth strategy is that our dividend income should increase every year. This is due to three factors.

  1. Reinvested Dividend– I reinvest most of our dividend income in new stocks. This will increase our total shares and dividend income.
  2. Dividend Growth– Most of the companies in our portfolio should increase their dividend payout every year. There will be some exceptions as some companies face problems. Last year KMI and Diebold cut their dividend. Mattel, Caterpillar, and John Deer did not increase their dividend in 2016. We’ll keep a close eye on these companies to see if we need to kick them out of our portfolio. Other than these, all our stocks increased their dividend a little bit.
  3. New Investment– We plan to add new money to our dividend portfolio whenever we have extra savings. This will also increase our total shares. In 2017, I plan to reinvest whenever we can. Last year, I held off too long on reinvesting and I didn’t like sitting on the sideline.

How to Start Investing in Dividend Stocks

It can be a little intimidating to start investing in dividend stocks. There are thousands of companies that you can invest in. How do you know which stock is good? If you’re just starting with dividend investing, here is a basic guide to get you started with a few solid companies. Don’t be intimated by the jargon, I will explain them below. I’ll also show you where to look up the data.

  • Start with Dividend Aristocrats
  • PE ratio is less than 20
  • Dividend yield is more than 2.5%
  • Payout ratio is less than 70%
  • EPS for the next and past 5 years should be positive

Oh, you’d need a brokerage account, too. For new investors, I highly recommend Firstrade. Firstrade is a great discount brokerage that I used for many years. Their fees were recently lowered so investors pay $0 per trade. That’s right. You pay nothing to trade stocks and mutual funds! Wow, that’s a great deal for new investors. Check them out, Firstrade is a great online brokerage.

Start with the Dividend Aristocrats

The Dividend Aristocrats are stocks in the S&P 500 index that have increased their dividend payout for 25 consecutive years. These companies are committed to their dividend and we shouldn’t see a lot of dividend cut. Recently, the Dividend Aristocrats have done very well compared to the S&P 500 index. Many investors are looking for income and they have been buying dividend stocks.

The Dividend Aristocrats list is updated every year. Companies are kicked out if they cut dividend and some companies are added as they satisfied the 25 consecutive years of dividend raises. When you start building a dividend portfolio, it’s best to stay conservative and go with these solid companies. Once you’re more familiar with investing, then you can branch out and buy more adventurous stocks.

Here is the list of Dividend Aristocrats at Wikipedia.

PE Ratio is less than 20

The PE (price to earnings) ratio is the price of the stock divided by their earnings. The bigger the PE ratio is, the more highly valued the stock. For example, Facebook’s PE ratio is 60. This is fine for growth stocks because their earnings are growing rapidly. For dividend stocks, the PE ratio should be closer to their historical average because they only grow a little bit every year.

  • P/E ratio = Stock Price/Earnings

You can get the Price/Earnings ratio from finviz, Morningstar, Yahoo Finance, and many other financial sites. We’ll look at Target (TGT) at finviz for example.

Currently, Target’s PE ratio is 11.8. That means the stock is a pretty good bargain at this time. Target is being valued at a discount due to the shift to e-commerce. Many retailers are hurting right now.

Anyway, the PE ratio for the S&P 500 is quite high (around 25) at this time and I prefer to invest when a stock is undervalued. We’ll only invest in companies with a PE ratio of less than 20.

Dividend yield is more than 2.5%

Now, let’s look at dividend. Dividend yield is the percentage of dividend payout to the stock’s price.

  • Dividend Yield = Dividend/stock price

Target’s dividend yield is currently 3.7%. When the dividend yield is low, it can mean a couple of things. The stock price could be too high or perhaps they haven’t raise dividend recently. I usually invest in stock with at least 2.5% dividend yield.

Also, we should be cautious if the dividend yield is too high. 3.7% is pretty high for Target and it means investors think the stock price won’t increase much in the years to come. As e-commerce continues to grow, Target might not be able to adapt and their earnings could drop. Things are changing in the retail world.

Payout ratio is less than 70%

The payout ratio is the percentage of earnings paid out as dividends.

  • Payout ratio – dividend/earnings per share

Generally, we should avoid investing in companies that pay out too much dividend. If a company pays too much dividend then they won’t have much money left to invest in the company. Also, they might not be able to keep increasing the dividend if they are already paying out a huge percentage. Target’s payout ratio is currently around 41%. That’s pretty good.

EPS for the past and next 5 years should be positive

EPS is earnings per share. This should be positive for the past 5 years and next 5 years. This shows that the company is still growing. If we see a negative number here, it means the company is not growing. (The EPS next 5Y is an estimate.)

More research

Those are the baseline criteria you should look at when you’re investing in dividend stocks. If you are interested and have extra time, you probably should check these other things, too.

  • Sales growth – Is the company’s revenue growing? Target’s revenue is down like most retailers and this is causing the stock price to drop recently.
  • Management team – Is the management team stable?
  • Stability – Check the Beta. It should be 1 or less. If it’s higher than 1, then the stock has been volatile and probably not a stable dividend pick. (reader’s suggestion)

Our Dividend Portfolio

Here is our current dividend portfolio. You can see there are quite a few Dividend Aristocrats here.

WIP – Link to Our Dividend Portfolio.

When to sell?

Selling is actually the biggest issue for me now. I prefer to just hold because I don’t like selling. Some dividend investors sell as soon as there is a dividend cut or no dividend growth. This probably is a good idea. I probably need to do a detailed review twice per year to make sure all the stocks in our portfolio still satisfy the basic criteria.


I’ll use VIG (Vanguard’s Dividend Appreciation ETF) as a benchmark for our portfolio. We’ve been able to beat them over the last 2 years. If we can’t beat VIG, then it’s probably easier to just go with them instead of managing a dividend portfolio. That’s a pretty good alternative for new dividend investors too. You could go with VIG and SDY (SPDR S&P Dividend ETF) instead of managing your own portfolio.

I update our dividend income every month on this page. There you can also see other ways that we generate passive income and how close Mrs. RB40 is to her retirement.

Track your Dividend Income

Lastly, here is a way to easily track your dividend income – sign up for Personal Capital. Personal Capital is a great free site for investors. They have many tools that can help you keep track of your investments including the 401k Fee Analyzer and the Retirement Planner. I log on to Personal Capital almost every day and they have been extremely useful. (This is an affiliate link and we may receive a referral fee if you use this link to sign up with them.)

Okay, that’s how to start investing in dividend stocks. If you’re a dividend stock investor, do you have other criteria on your list? When do you sell your dividend stocks?

You can see how we’re doing with dividend stocks at my Passive Income page.

Other resources

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.

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88 thoughts on “How to Start Investing in Dividend Stocks”

  1. Joe, thanks for sharing your knowledge. In your blog, your dividend income amount is pre-tax, correct? Do you actually cash it in to be your income or reinvest? I am wondering whether you actually spend the dividend.

    • Yes, our dividend income is pre-tax. At this time, we reinvest everything because we don’t need it yet.
      Once my wife stops working, then we’ll use some. I think in 2 years or so.

  2. This was a great blog!! I am researching investing in Dividend Stocks. The only investing I’ve done so far is my 401k. Are there any books, or other reading materials you can suggest for me to read before jumping in. I’m currently employed full time, so I am curious about how much money I would need to start? Can I start with $500 to $1000, what about tax implications, which brokerage should I start with etc. so many questions.

  3. Thanks for the link to dividata, I didn’t know about that one. Be careful just chasing yield without considering the other factors. I’ve had good luck purchasing in the PE < 16 range, but I have other screening factors including never investing in stocks with a market price of < $10 / share.

  4. I have been dividend investing for about 1 year now. Works well. Have a taxable account. I try and find stocks that pay a qualified dividend for tax purposes. I am now buying into some stock index etfs since my broker has options with very low expense ratios and no commission fees. Leaning towards value funds. Not as big of returns, but think they are safer overall in a downturn. Any other ideas on how to save on taxes? I use drip on a lot of the stocks too. Also take some of the dividends as cash to purchase more stocks or funds.

    • The tax reform changes everything. We’d need to wait and see how it affect dividend income. I’m not sure yet.
      In previous years, we saved by staying in the 15% tax bracket. That way, we didn’t have to pay any capital gains tax on the dividend. It didn’t work every year, though. We made too much income in some years.

  5. Hi Joe,

    Great post and I love your blog!

    I’m from the Netherlands and a very passionate dividend growth investor (DGI) since 2015. I’m fully invested in American dividend growth stocks (mostly large/mega-cap), which has provided me with more total return than I could ever have imagined! I’m 40 now and plan to reach financial retirement around 49 and retire at 55.

    I hope many will learn from blogs like yours, especially young people who wield the greatest power in wealth building — time!

  6. Great post! I switched my IRA accounts over to almost all dividend paying stocks earlier this year, because when I benchmarked my Mutual Fund dividends year over year I was horrified by the drop in income. Now I’m looking to build out my taxable accounts. The tax rates and dividend yields are on my radar when I try to determine which account type makes more sense to hold the shares in.

  7. Great Article! A few things – in your comparison to VIG it was confusing at first because the VIG investment reads $32,9134, with the comma off by one spot so I was just seeing $32k. But my real question is how do you get to 12.4% growth because the dividend is shy of that mark? Are you also including growth of the stock values?

  8. Thanks for this super informative article! I have been thinking about starting a dividend portfolio for quite some time — currently I only have SCHD in a taxable brokerage account and only about $3000 invested just to experiment. I’ve been thinking more on the tax inefficiencies of holding high dividend paying stocks in a taxable account — may I ask what was your reasoning for keeping it in a taxable account?

    My current income is too high to make direct contributions to a Roth IRA and though my dividends would be tax sheltered, I would like to open the possibility of having access to the dividends sooner since I am open to the idea of retiring at a minimum, 5 years early. The idea of researching the backdoor Roth is not super appealing for me since investment accounts are a fairly new area for me!

    • Hi! We are in the 15% tax bracket so we don’t have to pay any tax on our dividend.
      If your income is too high, then it might not work as well. But $3,000 is nothing. Your dividend will be around $100/year and tax on that is just $15. I wouldn’t worry about the taxes at this level. Investing in dividend stock will give you some experience.
      I wouldn’t worry about backdoor Roth at this point. You can read up on them when you get closer. Hiring an fee only financial advisor is a good option if you need help.
      Keep investing! Good luck.

    • Don’t settle for no IRA just because Uncle Sam says you can’t have a Roth. Get a tax deferred 401k through your employer. The longer you wait, the more screwed your retirement is.

    • Hey Joe, first of all thank you for writing this blog & your transparency. I started my investing journey in 2018 and was able to grow one of my individual portfolio’s to $280k. Secondly, I’m in a similar situation with my income being close to the IRS limit. I had to correct it by withdrawing my excess contribution. The backdoor Roth has been quite impossible to do w/ the lack of knowledge from my Company’s HR team & our 401k plan via American Funds/Capital Group. Both our Co.’s financial advisor and customer care rep said they barely get these types of questions. Really? Anyways, I shifted my strategy away from growing my Dividend portfolio into more growth stocks. I think when I early retire in 3-5 years, I have faith that my long term (3-7 yrs) growth stocks will grow tremendously so I can sell and pour them back into my Dividend stocks (plus less of a tax drag now). For me, it’s about maximizing my returns and paying less taxes.

  9. You have done a great job investing and creating as close to a passive income stream you can get. You seem to know your stuff too. I read an article today:

    It has me thinking that the best way for most is invest in a Vanguard market fund and let it ride, especially if you are in it for the long haul! Since you missed your mark this year against the VIG, to really keep pace you need to do %0.05 percent better than this year. When you take your time and effort into consideration, do you think it may be more passive and a better investment to move to a fund?

    Great artificial, full of knowledge. Thank you for sharing!

  10. Very good how to article. We look at the Beta. Seen companies with good dividends that are not necessarily stable. Like the Beta to be close to 1. Also sector, we do not like retailers for example. Thanks for posting this. It follows our entry and exit plan criteria.

    • I added Beta to the list. Thanks! Dividend stock should have pretty low beta or else it’s not a good pick for a stable portfolio.

  11. Hey Joe!
    We have a lot of similarities in our criteria. However, I have a “strategy” for selling that you might like. The reasons to sell are the same ones as to buy. Meaning when one of my criteria is not met anymore, I sell (unless I can easily explain the reason and I’m convinced it will bounce back in regards to future dividend growth and general growth). Also, I sell as soon as there is a dividend cut. Why? Simply because there are so many good dividend stocks out there to lose my time with a non paying one!
    Let me know your thoughts on this!

    • Thanks for sharing! I will update my spreadsheet with current PE and other metric. The problem with this is that the PEs are all too high. Many stocks have PE over 20 now. Do you sell everything that go over a certain PE?
      Dividend cut is a huge red flat for sure. I’ll try to sell DBD this year…

      • You have to look at P/E relative to the industry the stock is in. A P/E of 15 is considered a fair value multiple only for companies with average growth. For fast growing companies, a P/E of 20 or higher would be appropriate.

        Also for REITs, P/E is not the correct metric for valuation instead P/FFO or P/AFFO (FFO: Funds-From-Operation) is a more appropriate valuation metric. This is because REIT’s earnings include non-cash items such as amortization and depreciation of properties which artificially make their earnings number very small and hence a huge P/E multiple.

  12. I love this post – thanks for sharing your thought process!

    Personal Capital is a great tool, but has been an unending hassle for me as a dividend-tracking tool. They mis-classify a lot of transactions as “investment income” that has led me to do a lot of validation work and manual status changing. It has almost been easier to go directly to my 9 (!!) different accounts and look through their list of transactions.

    • Really? It’s working pretty well for me now. It used to count dividend twice a while back.
      You should email the support team and ask them to fix it. I wonder if it’s depends on the brokerage. I’m using Vanguard for everything now and it works flawlessly.

  13. I love the dividend strategy and started a nice dividend portfolio over the last couple years. However, the problem with it is that it works. I wasn’t quite ready for it to work so quickly. As my job income continues to grow I find myself desperate to shield more income from taxes. Now my dividend portfolio is kicking off an extra 3-5k per year that I have to pay taxes on and its really pissing me off. I probably won’t add to this portfolio and keep most of my taxable investments in higher growth lower income vehicles for now.

    • Sounds like a first world problem. 🙂 You’re right. If you’re in a high tax bracket, it might be better for you to go with growth. How does your dividend portfolio compare to your growth portfolio? You should keep track of them and compare the performance over the years. Including dividend and tax. Thanks!

  14. A lot of great tips in here. Dividend stocks are definitely one to have in everyone’s portfolio. It’s a great payout where some big growth stocks can boom and then completely bust and be near worthless by the time they’re done.

  15. In the comments you mentioned a follow on article regarding the tax implications for dividend stocks. I would really like to understand that more.
    Are you solely investing in dividend stocks for pre-retirement funds? Do you plan to stretch your dividend income for use in retirement too?

    Excellent post by the way! ?

    • Dividend income is perfect for us because we’re close to early retirement. Once we both retire, we won’t have much income and we won’t have pay tax on dividend. For other people who are still working, they have to pay 15% income tax on dividend. Depending on the situation, it might make more sense to invest in growth stock to defer paying taxes. Hope this clarify it. Thanks!

  16. This is some pretty good and helpful info. I haven’t experimented with as many dividend stocks as I would like to so this is a great refresher. Thanks for sharing your thoughts and congrats on your growth.

  17. As a boglehead I keep my portfolio extremely simple with only 3 funds :TSM, ISM and TBM. It works well for me in the long run , with one big problem : it’s too passive, really autopilot , and no fun or action at all. I like your strategy that involves more reading, more brain work, more action, not sure if more profitable but surely more active and more interesting, that comes with more expenses.

  18. The most important metric I like to look at is free cash flow where organic growth is driving a sustainable dividend. Also companies that either have low debt, or a reason for debt as like in your own personal finances, debt can be a drag on your cash flow. Debt however isn’t necessarily a bad thing if it’s used to add value thru acquisitions etc.

    I think one important thing to keep aware of with dividends is that a) you are a part owner in a company and b) they aren’t actually the value of the company, it’s a byproduct of the ability of the company to generate value. As opposed to say Google who does not pay a dividend since they prefer to invest their cash, dividend payments actually decrease the value of the company. As a company owner you’re entitled to the earnings, so it’s like you paying yourself out of your bank account. The value of the company as well will decrease by the amount they pay out in dividends.

    Don’t get me wrong. I like dividends. A lot. I even blog about them. But it’s important to understand what dividend investing is and is not, and how by many accounts dividend investing is uite popular and in somewhat of a bubble. If you aren’t interested in nuances I’d say stick with indexing, otherwise dividend investing can be quite interesting and addictive.

    My 2 cents (a blog dividend, if you will)

  19. Hi! I’m curious why you think 2017 is a better time to add to stocks? Was it simply the pain of sitting on the sidelines with cash?

    I’m genuinely torn. I know we can’t predict the future and doomsayers have been wrong. But this market does not look safe to me — as you pointed out, stocks are not cheap by most measures.

    Appreciate the article! –R

    • Yes, it’s mostly because I don’t like having cash on the sideline. My investing horizon is still 20+ years so I’m pretty sure it will be fine. It’s easier for me to just average in and not worry too much about market timing. Just keep my asset allocation on target. Other investors might be more comfortable with sitting on the sideline. Also, Trump seems to be good for corporations. He’s pro business.

  20. I don’t understand why a Boglehead-type index investor would become a stock picker when it comes to dividends.

    I can understand the challenge of trying to beat the market, but then why not use the same strategy with the rest of your portfolio? Or why not dedicate 5% of the portfolio for stock picking fun?

    It doesn’t seem to be passive if you have to manage it.

    If the goal is passive income from equities, why not do something like 1/3rd VIG, 1/3rd VNQ, and 1/3rd BND?

    • Our dividend portfolio is about 15% of our investment. That’s a pretty small part of our net worth. It gives me something to write about. 🙂

      • Ahh, I have about 5% that a play around with, but the idea just for appreciation of any kind. It can be something with good dividends like IBM or it can be something like Facebook.

        I didn’t mean it to be targeted towards you specifically either as I’ve seen a lot of dividend seekers become stock pickers. There are a lot of people who seem to do it, and I’m not sure it’s because it gives them something to write about (or at least it isn’t always expressed that way).

        • I think it’s because you can easily beat the index when you just look at dividend income. VIG’s payout is just 2.2%. You can easily beat that by being selective. I could pick a few stocks from VIG’s holding and it’d be better than 2.2.%.

    • A bogglehead type investor should stick with Index funds if they don’t want to do any work or if their investment horizon is very long.

      A near passive and stable income can be generated by being a dividend stock picker by doing upfront due deligence and occasional monitoring . The more work is done upfront, the less management is needed later.

      Indexing is for people who don’t want to do any work at all. Though, l still think some monitoring is required to ensure progress in the right direction.

      Btw, one of the downsides of indexing is the income fluctuates as the fund rebalances while investor having no say in it. The other downside is your return will always be average whereas in divi stock picking one has a good chance of beating the market.

      • Most everyone I follow is a Boglehead-type investor, but a few of them have dividend portofolios like Joe, which is what I didn’t understand. It’s as if they believe in indexing except for when dividends are involved.

        It would seem like VIG or NOBL has done most of this work. Why not trust the due diligence of the experts?

        And yes the income is going to fluctuate, but that can usually be managed by having a little extra in the emergency fund. If you are living off dividends you probably have a net worth of over a million, so I presume that type of person can handle the cash management.

  21. Great post!!!! I am slowly growing my dividend portfolio and see it as a great means of passive income. I hope in the near future FB will consider paying a dividend. Friend and family thought I was crazy for buying it when it first opened, but it’s been a great investment thus far. I always enjoy seeing my dividend income come in (and get reinvested). I certainly do not have enough to fund an entire year’s budget, but every little bit helps.

  22. Dividend investment is all I do. Even my blog is now all about dividend investing. One thing to note is that it takes a long time and lot of capital to build a big enough dividend income stream to cover a full year of expenses. So starting early is always a good idea and one must have lots of patience.

  23. You provide some great advice on starting a dividend portfolio. I read several good books on this topic last year when I thought I wanted to grow a dividend portfolio to provide passive income to one day cover my expenses. I’ve since switched to growth stocks mainly because I’m trying to build an after-tax portfolio and dividends stocks are not tax efficient when you don’t need the income. In retirement however, they’re a great source of passive income as you won’t pay taxes on qualified dividends on up to $75k if you’re married.

    For now, my plan is to stick with growth stocks in my after-tax portfolio and convert a portion of it to dividend aristocrats when I retire to provide steady income.

  24. Awesome and informative post, Joe!

    The Dividend Aristocrats is great for finding good dividend stocks as it’s hard to get in and very easy to get removed from the list. It’s really hard for a company to keep raising their dividends 25 years in a row, I would think!

  25. conceptually investing in dividend companies is a no-brainer, but still i just can’t pull the trigger — as per a comment above, it just requires so much investment to get any real return, that i would rather put the little money i do have into index funds and realize whatever the return is on that – guess it could just be my ignorance when it comes to the stock market, but i just feel “safer” investing in the whole market.

    great post though and for sure a future reference should i ever consider dividend stocks.

  26. The tax implications brought up by Brandon are an interesting point. Most of our after-tax accounts are in Vanguard index funds. As a bit of an experiment, we did put some money (equal parts) into Vanguard High Dividend Yield (VHDYX) and Fidelity 500 Index Fund (FUSVX) to see how they compare after a few years.

    We are still around 7 years away from retiring, so we may want to re-think loading up on too many dividends right now. Thoughts?

    • I think I’ll need to write a post on the tax implication of dividend. It’s a bit too complicated to think casually about.

    • There are certain asset classes that allow you to defer paying taxes on distributions/income you receive from the companies you invest in. For example, distributions from companies in the MLP space are mostly return of capital that incur no taxes during the first several years, until you sell the stocks or when your basis reduced to zero. I have a substantial amount invested in MLPs to reduce my income (I received return of capitals, not dividends) and this helps reduce college bills for my kids.

      • I had KMP (an MLP) and they converted to stock a couple of years ago. The tax was a huge mess. I can’t imagine owning many MLP for the long term. The tax would be impossible to deal with when you sell. I guess you can just hire a tax person…

  27. I had not heard of the Dividend Aristocrats before, interesting list! I haven’t bought any individual stocks in years, but I still think about it. I like the stress free aspect of being a index investor. I did look at possibly investing in some of Vanguards dividend indexes like Vanguard Dividend Appreciation, but compared to Vanguard Total Stock Market the performance is very similar so I didn’t bother with it.

    I do have some apple stock I was thinking to sell though – my last individual holding. Maybe I’ll consider buying some dividend stocks with the proceeds. That way I’ll still have some individual stock investments 🙂 Thanks for the great info!

    • If you like the stress free index funds, you should probably stick with it. 🙂
      Individual stocks are a bit more stressful. Although, dividend stocks cause much less headache than tech stocks.

  28. Hey Joe,

    As someone who plans to “semi-retire” soon using dividends as the primary source of income, I think this is a good primer on dividend investing. For a variety of reasons (some of which you hinted at here), I consider stock dividends among the best sources of passive income. However, I do not think it is entirely passive. It is certainly passive relative to trudging into the office or managing a rental property. However, building a portfolio of well-chosen stocks does take some time. And, even after established, it does require some level of monitoring IMHO. Granted, there is a wide range of opinion on how much monitoring is necessary. And that would most likely depend on the nature of the portfolio (what stocks, how many, etc.).

    I frequent numerous dividend growth investing websites/blogs to get a variety of opinions on the topic. And while many of them are informative and useful, they often have a wide variety of opinions on how much monitoring is necessary. Many bloggers that advocate holding large numbers of dividend stocks (often 50+) lean towards minimal monitoring while others (especially those advocating lower numbers of stocks, usually 10-40) caution that a greater amount of monitoring is essential.

    As with most aspects of finance, this is largely a matter of personal choice. But, I do think some level of monitoring is necessary with maintaining a portfolio of individual dividend paying equities. Thus, it is not entirely passive.

    As I hinted above, there are many great resources (websites, books, etc.) for anyone interested in dividend investing. Perhaps, you could list some in the comments here or in another article. However, for me, one name merits specific mention. David Van Knapp writes extensively about this topic. His articles are thorough yet concise enough as well as being lucid and objective. You can find some on Seeking Alpha and he has an excellent series of both “Dividend Investing Lessons” and individual stock analysis on Daily Trade Alert. IMO really worth checking out for anyone interested in this topic.

    • I subscribe to Seeking Alpha’s dividend newsletter. They are good reads, but probably too much info for new dividend investors. How much time do you spend monitoring your portfolio? Is there some way to automatically flag an issue like Q/Q earnings drop?
      I’ll add David Van Knapp to the resource. Thanks!

  29. Dividend investing is a topic that I don’t know a ton about, so I appreciate the insight into this arena. Whenever I look at dividend investing, it always seems like something that requires a ton of capital to get meaningful dividends, which is why I continue to stick to index investing. Do you think it’s something that folks should start looking into once they have more meaningful sums of money to invest?

    I like the idea of having a certain amount coming out to you every year without thinking too much about it, and could see it as something I do down the line when I’m more financially settled.

    • I think you can start anytime. Jason @ Free at 33 started small and he’s doing very well. I think it’s best to start about 5 years before you need the income.

  30. I seem to be torn on this. I love the dividend stocks as well (and have quite a number of them), but a part of me thinks the smarter move is to stick with a broader base of index funds so I don’t have too much weight in single stocks.

    Most of the dividend stocks I do own are the Dividend Aristocrats and they pay out more than say a Vanguard ETF or mutual fund, but I feel a little safer not having all my eggs in one basket.

    On the flip side, that nice payout makes those individual stocks a lot more valuable and tomorrow you could ask me and I’d probably say that I prefer dividend stocks! 🙂

    — Jim

    • All of our retirement funds are invested in low cost Vanguard index funds too. The dividend portfolio is to help generate usable income for early retirement. I think it’s good to have both. Low cost index fund is the foundation of our investments. That’s the way to go for conservative investors.

  31. At what point do you stop reinvesting the dividends? I’m only 24 and I reinvest the dividends from my Roth IRA, but I’m curious when to start letting the income grow in the account instead of reinvesting it. I’m guessing never, since you always want that money to continue growing, but there’s surely a point where you need to actually withdraw those dividends, right?

    • For us, we’d probably stop reinvesting when we need to use the money. That will come when Mrs. RB40 retires from full time work. If you don’t need the money, then it’s best to keep reinvesting.

    • I considered selling covered calls and decided against it. From what I understand, covered call limits your upside too much. All these stocks have gone up quite a bit over the last few years. I’d hate to sell them. Is that the wrong impression? I might need to research covered call again.

      • No, you are right. you limit your upside, this is true.
        but even if the goes up, it doesnt mean you have to sell your shares.
        For instance you are able to roll the call into the next month or roll it up to a higher strike-price

        best regards

  32. Thanks for diving further into this Joe – I agree that from a passive income perspective this is a great strategy. Buy – hold – collect.

    I have been going back and fourth on getting into this arena, we are primarily index fund investors right now. Maybe we will start with VIG in one of our Roths and see if we like the dividend approach.

  33. One of the downsides of dividends is of course lost growth potential due to taxes. For someone like me who has a full time job and lands in the 25% tax bracket, I pay 15% tax on all dividends. I pay nothing for any gains I make if my funds grow larger until I decide to withdrawal the money. If you are above the 39.6% tax bracket you will pay 20% and if you are over 200K (single) or 250K (couple) you will pay an extra 3.8% tax.

    So for someone in the 25% tax bracket, like me, you would need to somehow make an extra 15% from dividends every single year to be equivalent to a growth strategy. So, let’s invest $10,000 in a dividend strategy and $10,000 in a low cost index fund. Let’s say I make $1000 in dividends, that means I pay $150 in taxes, that means I really only made $850. The index fund grew to $10,900. Even though the dividend strategy beat my index fund 10% vs 9%, the index fund still wins because of taxes. The next year it gets worse and the next year it get worse again, it’s an exponential problem. Let’s also be honest, do you really expect to be able to beat the S&P500 every year?

    I think a dividend strategy might work well for someone who is retired and doesn’t have years and years of growth potential to lose. It just doesn’t make sense for most people to voluntarily pay taxes upfront when you can defer them to the end.

    • That’s a great point. I will update the post today with your input.
      Dividend income is a good fit for many investors, but not everyone.
      Your index fund also provide dividend payout, right?

    • I was thinking the same thing. I hold my high dividend paying stocks and REITs in my retirement account and have etfs like VTI and Berkshire Hathaway (no dividend) in my taxable accounts.

  34. I’m a fan of the strategy, Joe, good overview. I’ve always heard of the dividend aristocrats, quite an impressive feat to be in that category! It doesn’t sound like you can go wrong by owning a portfolio of them.

    I like the diversification in your dividend portfolio! I may look into moving a portion of my portfolio to a dividend focused portfolio eventually, but right now I am primarily an index fund investor. At this point, I’d probably be biting off more than I can chew by trying to track a portfolio of individual companies.

    Thanks for the great post, Joe. I’ll be holding onto this one when I do eventually decide to pursue it.

    • I forgot to add that most of our investments are in Vanguard index funds. The retirement accounts are all in index funds and the after tax account has dividend stocks to generate income for early retirement. I’ll update it today. Thanks for helping out. 🙂

  35. Hi, very interesting!

    What are you thoughts about investing in other countries aswell? There are good dividend companies in Canada aswell as Europe (probably Asia too but I am unfamiliar with those)

    Then of course you would get currency risk but at the same time also a bit more distribution. Of course US-based companies are doing buisness worldwide so you get it anyway..but..yeah. :). I think all the companies in your portfolio are from the US-market and nowhere else?

    Best regards

    • I don’t know enough about international dividend stocks. I just go with index funds for international diversification. The only one we have right now is Shell. Most of the companies in our portfolio operate in many countries.

  36. Hi Joe, that’s right Dividend growth investing is a great strategy. Every buy must consider different aspects of the stock one of them “up side potential” one needs to be careful to get into those dividend traps that offer great dividend but no growth thus not cap gain.
    Thanks for the clear guide and examples! as always very helpful!

  37. Joe, I’m definitely more bearish with growth stocks coming into 2017. I’ll likely convert some of these to dividend stocks and/or muni bonds. Thanks for the clear and concise breakdown of dividend stocks. There’s always more to learn! 🙂

    • I’m thinking more about muni bonds too. They are a good fit for high state income tax locations like California and Oregon.

    • I agree that this is a great article on dividend growth investing. It is great to see that the strategy has worked so well for Joe and Mr Tako, as evidenced by the growth in annual dividend income.

      However, I would not use the dividend aristocrats, because this list does not include all companies in the US, which have managed to grow dividends for at least 25 years in a row. I would encourage you to use the dividend champions list:

      Good luck in your investing journey!

      Dividend Growth Investor

    • Do you have any tips for everyone? $48k per year is outstanding. You’ve got a great head start with 15 years. We’ve only been doing this for 5 years.

      • Joe,

        If you converted your $2M networth into a portfolio of dividend growth stocks, you can easily generate $60,000 in annual dividend income. Or even if you kept it in an index fund, you will easily generate $45,000 – $50,000 in annual dividend income.

        Do not short-change yourself!



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