Hey Reader

Last week I talked about why I stopped paying someone else to manage my stock portfolio. This week I want to share another piece of conventional investing advice I don’t follow.

And that’s buying dividend stocks. Everybody says they’re the key to passive income. And in theory it makes sense. Get paid just for owning a stock. Who wouldn’t want that?

However, the math doesn’t always add up.

Take Verizon, one of the most popular dividend stocks. It yields around 6% today, which looks great on paper. Part of the reason that yield looks so high is that the share price has fallen and look at what it has produced for investors. $10,000 put into Verizon a decade ago, with every dividend included, would be worth roughly $14,000 today. That works out to about 3.6% a year.

That same $10,000 in the S&P 500 over the same period grew to roughly $47,000, about 15.7% a year, and it didn’t require chasing yields or payout ratios.

And the same $10,000 in Amazon, which has never paid a dividend, grew to somewhere between $67,000 and $80,000 depending on when you purchased it. Amazon reinvested its profits back into the business instead of paying it out. That reinvestment became AWS, Prime, and one of the most dominant companies in the world.

Something often overlooked about dividends is every dollar a company pays out in dividends is a dollar not reinvested back into the business. Dividends come from profits the company already earned. If you own the stock, those profits are already yours. The dividend is just one way of getting them back.

For mature companies whose growth has peaked, a strong dividend can make sense. It’s a way to return value to shareholders when there aren’t better uses for the cash. That’s why established blue chip companies tend to pay them. If you have significant assets and want to minimize risk, they can be a good place to park your money.

But if you’re still building wealth, chasing yield may be slowing you down.

Don’t get me wrong, I’m not anti-dividend. Some of my best performing stocks, American Express, Microsoft, Nvidia, all pay dividends. But I didn’t buy any of them for the dividend at the time. I bought them because they grow.

Before you buy a stock simply for the yield, do the math first. If a stock yields 4%, you need $250,000 invested just to earn $10,000 a year before taxes. That’s a significant amount of capital working for a modest return. For some investors at the right stage that makes sense. For most people still building, growth is the better bet. The dividend is a bonus. Make sure the company earns it.

— Stock Savvy Dad
​Invest smarter, build wealth, be a savvy dad.