Let’s compare two retired investors: Dividend Dan and Total Returns Tom. Dan’s portfolio consists mostly of dividend-paying stocks. To highlight the wisdom of his approach, Dan points to 2008, when his 5,000 shares of AT&T generated $8,000 of dividend income. It didn’t faze him that AT&T’s share price fell 31.4% that year because it didn’t decrease his income. In fact, the $8,000 he received was more than the $7,100 he received in 2007 — a remarkable increase of 12.7%. Like other so-called “dividend aristocrats,” AT&T has a long history of annually increasing its dividend payout, come what may in the markets.
On the other hand, the mutual fund-based portfolio of Total Returns Tom is built around an assumption that total returns (which includes the reinvestment of most capital gains, interest, and dividends generated by his holdings) will be sufficient to allow him to periodically sell shares while still growing his portfolio. Selling during the downturn of 2008, however, meant locking in significant losses.
With an example like that, it’s easy to understand the appeal of dividend investing. However, as with so many things, there’s more to it than meets the eye.
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