Mindy Jensen: Dividend investing is one of those topics that we have strong opinions about, so we haven’t really covered it a lot on the show. While Scott and I both have a heavy bias against dividend investing, not everyone in the community feels the same way. So today we’re bringing on Eli Breece from Dividendology to challenge what we think we know and answer the question, can dividends actually be a good way to build wealth and pursue FI? And as always, this episode is not investing advice. This podcast is for entertainment and educational purposes only. Hello, hello, hello, and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen, and with me as always is my reinvested co-host, Scott Trench.
Scott Trench: Thanks, Mindy. I’m going to buy back our time and jump right into the episode today. We are so excited to be joined by Eli Breece. Eli is a former real estate analyst who took a different approach to building wealth, shifting his savings into a dividend-focused portfolio rather than relying solely on a traditional retirement account. He shares his journey, strategy, and insights on his YouTube channel, Dividendology. And today, he’s here to help us better understand more about dividend investing. So without further ado, Eli, welcome to the BiggerPockets Money Podcast.
Eli Breece: Scott, Mindy, it’s such a pleasure to be here. I’ve enjoyed watching your show over the years, and I really appreciate you having me on the show.
Scott Trench: Awesome. Welcome. And to get things started, we’re going to make the case against dividend investing here to get going. And Mindy, you want to take this and tell Eli why we are against dividend investing, generally speaking, at least coming into the conversation?
Mindy Jensen: Okay, Scott, here are my biases on why I am not pursuing a dividend investing strategy. Number one, it’s not guaranteed. The company can simply stop paying out a dividend at any time. Money paid out in dividends is not money being reinvested into the company. It’s not the free money that you think it is. Could be very tax inefficient, and you’re primarily buying individual stocks instead of index funds. Yes, index funds pay a dividend, but not every stock in that fund pays a dividend. That’s not why you invest in index funds, but in order to be a dividend investor, you are focusing on individual stocks. Scott, do you have anything to add?
Scott Trench: My issue with dividend investing is that there are five uses of capital, generally speaking, that a company can proceed with. One is buying back shares, one is investing in operations, one is a dividend, one is acquiring companies, and the last is building up their cash position or paying down debt, doing something on the balance sheet. By focusing on dividend investing, specifically growth dividend investing, which we’re talking about today with Eli, you’re overweighting the companies that feel that that’s the best use of capital relative to the rest of the economy, and I’m not sure there’s compelling evidence for that, in addition to the concerns you listed, Mindy, including taxes and the realization of income you may not want, especially in early retirement. Eli, why do you invest in dividend growth stocks?
Eli Breece: So there’s a few different reasons I specifically invest into dividend growth stocks. Number one, perhaps most important, is it is a total return strategy. There’s great studies from S&P Global we can look at today that over full market cycles, dividend growth investing actually does outperform. The second is perhaps almost just as important, is it completely alleviates the sequence of return risk, which we can dive into more what that actually looks like. But it’s the idea that if you’re living off the 4% rule in retirement, essentially if you retire into a bear market, you’re going to run out of money versus a dividend growth strategy. You continue to receive your income, and that income grows over time, ideally at a rate above inflation. And thirdly, dividend growth forces you to actually focus on the underlying fundamentals of the company. It forces you to be a long-term investor. If we look at the three sources of returns, we have dividends, we have share price appreciation, and then we have, which again is the result of earnings growth or changes in the valuation multiple. I can’t predict what sentiment will be like and what changes in a stock’s valuation multiple will be in the short term, but I can project future cash flows and what dividends will look like. So that’s my case for dividend growth investing. I’m looking forward to diving into this with you guys.
Scott Trench: And I love it. Thank you for stating those, because there’s several misconceptions in the personal finance world around dividend investing. And by the way, what you just said is an academically supported worldview that is also challenged by credible people that say no. There’s a very famous theorem, Modigliani-Miller, that says nope, that’s completely false. And in a frictionless marketplace, the dividend yield and policy is totally irrelevant to your long-term total returns. But there’s also an academic case for what you just said, where dividend investing does insulate you from sequence of returns risk to some degree. So there’s a serious component to it and a real challenge to it in the marketplace.
Mindy Jensen: So with sequence of returns risk, you are trying to mitigate the fact that the market goes down while you’re pulling out money in the beginning of your retirement. But if the market goes down, companies stop paying out dividends or lower their dividends. So I don’t really see that as a hedge against sequence of returns risk.
Eli Breece: Yeah, I would completely disagree with that. So I actually had a conversation with David Bahnsen the other day. He manages $10 billion utilizing a dividend growth strategy, and he actually started his career in 1998 at the peak of the dot-com bubble. And he saw all of his clients who he was managing, all this money, and they ran out of money if they were utilizing the 4% rule. But if you look at a lot of the underlying companies, even stocks like Texas Instruments, for example. So Texas Instruments, at the peak of the dot-com bubble, took 17 years to recover from their all-time high, which is just absolutely brutal. And that’s not even including inflation. If you include inflation, who knows what that would be? But they increased their dividend payout by over 2,300% during that same 17-year time period. The dividend was never reduced. There’s plenty of stocks that actually never reduced their dividends during the dot-com bubble. So really, the argument you have to make, I think, Mindy, would be how do we find these stocks that don’t reduce their dividends during these type of scenarios, right? Ironically enough, this is where the outperformance that I just cited comes from. So S&P Global, I was looking at this study the other day. They show that the Dow Jones US Dividend 100 Index, they did backtested data starting in 1998, has returned roughly, to around the time recording this video, around 1,750% cumulative return, while the S&P 500 is 940%. Now, the obvious pushback to that is that was right before the dot-com bubble, and that’s absolutely true, right? One, that doesn’t eliminate the fact that real people were retiring into the dot-com bubble and ran out of money when utilizing a withdrawal rate. But number two, it points out where does that outperformance over full market cycles actually come from? And what the Hartford Funds study shows us, it’s a great study, but it shows us that dividend growth stocks achieve most of their outperformance during bear markets. So stocks that don’t pay dividends, what this study showed, do typically outperform dividend growth stocks in raging bull markets, which there’s no doubt we’ve been in really over the last four years since 2022. But the outperformance during bear markets is so much that over full market cycles, like we’ve seen over the last 30 years, dividend growth stocks have done exceedingly well. And like the total returns I just cited, it’s quite strong. And the last thing I would add to that, they did another study of the Dow Jones US Dividend 100 Index, starting, I believe, in the year 2001, to kind of bypass the dot-com bubble. And again, it outperformed a total market index. So if we’re going to talk strictly bull markets, dividend growth investing will do well. It probably won’t outperform when we have stocks like Palantir and SanDisk running 300% to 600%. So that’s the case, one, for total return strategies with dividend growth, but also eliminating sequence of return risk.
Scott Trench: This is the case. And again, it’s contested, right? By the way, I don’t think a lot of people run out of money with the 4% rule.
Eli Breece: Can I add a caveat to that real quick, Scott, if you don’t mind?
Scott Trench: Go ahead.
Eli Breece: I hate to interrupt you, because you’re right, this 4% rule actually has a very high success rate. It’s sitting at roughly 95%. I think it was like 95, 97% off the top of my head. But here’s the issue with this. I was looking at the study the other day, anytime the Shiller CAPE ratio is above, I hate to say the wrong data point, I want to say it’s above 20, 21, 22, the 4% success rate drops to about 75%. And our current CAPE PE multiple is sitting at about 40, which is the equivalent of the dot-com bubble, meaning the 4% rule currently has a 0% success rate at current valuation multiples of the market. So yes, you’re right, over the whole time period, incredibly high success rate. At current valuation levels, it’s literally a 0% success rate. The caveat is, yes, maybe we’ll have faster earnings growth with AI, but that’s just the reality of what the data’s currently telling us.
Scott Trench: I’ve been worried about this since early 2025, the Shiller CAPE, and I’ve been looking silly for that entire time period. I agree with that concern. And the question is, what do you do about it? And your answer is dividend growth. And I think there’s lots of other answers out there as well. But I want to go back to this point that you’ve made around the withdrawal sequencing, because the reason for a bear market, I believe, is a huge part of the argument you’re making, right? If what is happening in the bear market is the company is unable to generate cash flow to pay out shareholders, your thesis breaks on growth dividend investing. If the reason for the bear market is multiples have come down and cratered, now all of a sudden that is the argument for growth dividend investing, right? Because if I own the S&P 500 and I’m forced to sell it into a deep bear market at 7, 8 times earnings, that’s where I get crushed as an investor in an index that’s not dividend investing. If the cash flows are the same, or growing, throughout that time period, and I’m receiving the dividend portion from it, then I’m never selling the golden goose during that period, and I’m just harvesting the eggs. That’s where the crux of this argument for dividend growth comes in, right?
Eli Breece: You’re absolutely spot on, because we can sit here all day and talk about, oh, dividend this, dividend that, but free cash flow is the only thing that matters. It’s the only thing that matters because ultimately dividends are paid out of free cash flow. You talked about capital allocation right at the intro of this podcast, and that is the most important topic for us to even touch on if we’re going to talk about any type of investing— capital allocation and free cash flow. How’s a company using its free cash flow? So if a company’s free cash flow is declining in a bear market, then absolutely that dividend is at risk, unless maybe the free cash flow payout ratio was only 20 to 30%. So really, the conversation you have to have is, how do you find stocks that can maintain their dividend during these market pullbacks? If you’re buying an Altria who’s currently sitting at an 80% free cash flow payout ratio, and they see a 10, 20% drop in free cash flow in a bear market, then the dividend’s getting reduced. It’s that simple. So yes, you’re right, the caveat is I think there are instances, specifically when you’re picking individual stocks, where you can find examples of stocks that can maintain even during turbulent growth periods for the market. They can maintain their dividend.
Mindy Jensen: I was a little stuck on this when you said that, oh, most of them didn’t reduce their dividends.
Eli Breece: Oh, well, I’ll be careful what I say. I don’t know about most. There’s a lot of examples, right?
Mindy Jensen: There were plenty of companies that continued to pay out dividends. I can’t remember exactly your words. So I looked it up, and during the dot-com era, you are correct, exceptionally low, like fewer than 1% of companies stopped paying out their dividends. In 2008, we had 5.9% of S&P 500 dividend payers completely stop, and 33% of all dividend-paying firms reduced or stopped. So that 33%, I would assume, includes that 5.9%. So 5.9%, I can see that being like, okay, not such a big deal. However, if I am in that 5.9% of the S&P 500, that’s a huge ding to me. And 33% reduced or stopped paying out— 33% of the companies in the S&P 500. But again, if that’s where my money is at, 33% of dividend-paying companies.
Scott Trench: Right.
Eli Breece: I follow.
Mindy Jensen: So I just want— I want to clarify, because somebody is going to be like, it wasn’t 33% of the S&P.
Scott Trench: Well, that’s it, though. That’s it. In 2000, the dividend payers probably crushed the broad-based market, right, in terms of safety and total return over the following decade. And from 2008— because the problem with 2000 wasn’t that global corporate profits really got crushed, it was valuations normalized. And in 2008, in the Great Recession, earnings got crushed. And that fundamentally kills your cash flow ability from the dividend. So, I actually don’t have the specific data in front of me, but does that theory line up with exactly what happened in the relative performance of the two categories, Eli?
Eli Breece: Well, Scott, I think you hit on exactly what I was about to say. You beat me to it. You have the change in multiple versus the actual change in earnings, which, Mindy, I guess the rebuttal would be, if you’re blindly picking dividend stocks and only looking at the yield, then yeah, you’re going to get hit pretty hard. People would say, oh, this is hindsight bias, but if two-thirds of them didn’t cut their dividend, I think you could manage pretty well picking a lot of the stocks that have very clearly maintainable yields. Now, I think where a lot of people might not follow with me is, for my personal portfolio, the yields that I buy are quite low. So Microsoft is a large holding in my portfolio. Broadcom is a large holding in my portfolio. Visa. These are stocks— Broadcom went through a period of time where the yield was 2 to 3%. Microsoft did as well. But as of right now, the yield is around 1% or lower. But these are stocks. Because they’re growing free cash flow at double-digit rates, the dividend grows at a double-digit rate, creates a really strong compounding effect, and those dividends are incredibly safe. I can’t speak to everyone, because I don’t know what stocks people were buying in 2009. I don’t know what stocks people are holding now, but in a scenario where earnings pulled back significantly right now, you’re right, dividends aren’t guaranteed, but these are stocks where the free cash flow payout ratios are roughly 20 to 30%. We would have some serious issues if those are stocks that are cutting their dividends.
Mindy Jensen: So in an “explain it like I’m 5,” the reason that they’re not going to be cutting their dividends is because the dividend isn’t really much of their outflow, right?
Eli Breece: So theoretically, if they’re using 30% of their free cash flow to pay out dividends, that’s 70% left over that’s either reinvesting back into the business, buying back shares, paying down debt. And for the most part, they have relatively strong balance sheets. Microsoft is spending a lot on CapEx right now, but they’re not dipping into debt markets in the same way that Meta and Amazon are. But yes, you’ve summarized correctly, Mindy.
Mindy Jensen: Okay. Okay. I pulled up Microsoft just to see what their share price is and their dividend. Right now, their share price is $491, and they’re paying out a $0.91 quarterly dividend. So I’m going to have to have a lot of capital allocated to Microsoft specifically in order for this dividend to be any sort of—
Scott Trench: It’s less than what I’d get if I just was in the S&P 500 index fund, right? So that’s interesting. You call this a dividend growth investment.
Eli Breece: Right. Well, this is a very important caveat, because the reality is that dividend growth pays out very little in dividends in the short term. You’re really not investing in these stocks for the dividend right now. If you’re investing for the yield you get in year one, then don’t do dividend growth investing. Dividend growth investing is not for you. But if you’re investing for the yield you could get in 20 to 30 years, dividend growth investing is how you get yields on cost of 30, 40, 50, or even 60%. So the obvious example that we’ve all heard a million times is Warren Buffett’s investment into Coca-Cola. I don’t remember off the top of my head when he made that investment, but his yield on cost on his initial shares is pushing, what, 60 or 70%? So theoretically, say he invested $1 million— I know that’s not the amount— maybe in that first year he got a 1 or 2% yield. Down the road, he would be getting a 60, 70% yield. So on a $1 million investment, he’s getting paid $600,000, $700,000 a year. So I guess what I’m trying to say is, this is not a short-term strategy. This is not a maximized-yield strategy. This is a strategy where you focus on long-term fundamentals, and you get a stream of income that grows every single year. Broadcom’s a good example. That’s probably the biggest winner in my portfolio. I added it a little over four years ago. The yield right now, I don’t have it in front of me, it’s below 1%. My yield on cost off the top of my head, I want to say is roughly 4 or 5% already when I just bought the stock four years ago. Why? One, I did buy at a good valuation when the yield was a bit higher, but also it’s growing the dividend at an extremely high rate.
Scott Trench: So Eli, I just got to challenge this premise, because I’m going to call it out. This is not dividend growth investing, what you’re doing here.
Eli Breece: Oh, it’s definitely dividend—
Scott Trench: Yeah, you bet on Microsoft and Broadcom. That’s a technology bet on companies that have, essentially the entire time you’ve held them over this last period, been very richly valued as growth stocks. They’ve grown so much that your dividend— when people talk about growth dividend investing, the academic case for it is I am going in at a higher yield right now, much higher than what I get from the S&P 500, and that higher yield is what insulates me from sequence of returns risk. That is the defensible academic grounding that, again, challengeable but defended. And there’s a real cadre of people who believe that, but nobody in that field, I think, would be making the argument that Broadcom or Microsoft are examples of the implementation of what is defensible academic theory in growth dividend investing. Is that fair to say?
Eli Breece: I would disagree. And here’s what I would want to ask you: what does the starting yield have to be to be considered a dividend growth stock?
Scott Trench: That’s the question. Yes. And I would say 0.73% seems— no way, right, with Microsoft.
Eli Breece: This doesn’t have to be a number you have to defend. I’m just curious off the top of your head, like, what number would come into your mind?
Scott Trench: I think that in theory, you’d have to start with whatever the index is that you’re investing within. It’s got to be higher than the starting yield of that index. That’s at least where I’d anchor the discussion.
Eli Breece: I guess for the S&P 500, you’d say 1% to 1.5%. It’s been somewhere in that range.
Scott Trench: I would have imagined you would have said something higher than that. I don’t know the answer. That’s why we’re interested in talking to you about this. But I would say surely it’s got to be higher than that, right?
Eli Breece: So here’s the thing. I’m looking at Broadcom. I could pull out any piece of data, but in October of 2022, the trailing 12-month yield— the forward yield was higher, was 3.7%. I’m looking in 2021, it’s roughly 3%. Obviously 2020’s not the best example because all the yields were high, but it climbed close to 6, 7% there. 2019, the yield is 3%. 2018, the yield is still around 3%. I guess it depends on your goals, but my argument is really you want to look for stocks that are growing free cash flow at a high rate. So some people would define that as growth, but we’re looking for the dividend growing behind it. Now, it indicates a couple of different things as well.
Scott Trench: I’m still stuck on this, and I think a lot of other people will be too. I buy that in certain cases you enter into a company at a higher yield and then years go by, its yield reduces, and you’re still so far in the money from your cash flow that your income stream has grown significantly in some situations. And I buy that that would’ve happened with Broadcom as a specific example, right? That’s a trillion-dollar company now. AI boom. So I buy that that happened. I guess that brings two questions though. What is the rule set governing when you enter into a dividend growth investment? And what is the rule set for when you exit a company that no longer meets that criteria because it’s been an enormous growth winner by accident?
Eli Breece: So in a perfect world, we do want higher yielding investments. I think that’s true for everybody because, for example, let’s just say something outrageous that will definitely never happen. If Apple stock fell by 80%, the yield is going to climb up to what, 4, 5, 6%, right? Everybody would know that’s a great investment. They’d be like, look at the yield, the dividend’s going to grow. That’s never going to happen. However, there are instances where because the company’s mispriced from what their valuation should actually be, whatever their intrinsic value is, the yield is higher, right? I think that happens more frequently than people realize. So let me give you an example. MPLX is a stock that I added, I guess it was the beginning of this year, maybe early 2025. At the time, it was yielding roughly 8.5%. And MLPs have been a great sector to be in this year. Obviously, we’ve benefited from some unforeseen circumstances undoubtedly in the energy space, but management over the last two to three years has guided towards 12.5% distribution growth. That’s hard to beat from a dividend growth perspective, getting the 8% starting yield with that level of distribution growth. Now, I don’t think future cash flows are as predictable as, say, a Microsoft, Broadcom, Visa. So that’s the caveat to that. Maybe you can project cash flows out three or four years and feel confident about the dividend and the dividend growth. But the reality is, in a perfect world, you do want to find this pricing where the yields are higher so your dividend yield on cost can grow higher over time. The reality is the safest way to approach dividend growth investing is stocks growing free cash flow at a double-digit rate with projectable, predictable cash flows even five to ten years from now, because you can feel confident that dividend will grow over time. So we’re looking to maximize total returns still. That’s the answer. We’re not looking for yield at the price of sacrificing total return. We’re looking at the capital allocation of these different businesses, and we’re asking ourselves, is this a stock that can maintain and grow its dividend over time? The yield is really not the first metric we should be looking at if we’re a dividend growth investor. And that’s my opinion. I’m sure some people claim to be dividend growth investors and they think the yield is the first thing, but to me, if the yield is the first thing you’re looking at, you’re a dividend investor, you’re a high-yield investor. So I would say that’s the caveat, in my opinion. So hopefully that clarifies maybe a little bit of your question.
Mindy Jensen: So I come at things from a different way than Scott does, but what I’m seeing with the Microsoft stock is that it is priced at almost $500 and it’s paying me not even a dollar quarterly. To me, I want to maximize the yield. Otherwise, why am I putting my money in this stock?
Eli Breece: Well, Mindy, I thought you were a total return investor though.
Mindy Jensen: I am a total return investor. For this scenario, I am pretending to be a dividend investor. UPS pays a 6.6% annual dividend yield. So $1.64 a quarter on an about $100 stock price. That is a lot more understandable. There’s another one, Altria, that’s 6.3%. I don’t invest in Altria because they used to be called Philip Morris. They make cigarettes, and I don’t want to support that company. But yeah, they pay a lot of money because people aren’t going to stop smoking anytime soon. There’s a REIT that focuses— would you consider a REIT to be a dividend stock?
Eli Breece: Yes, I mean, most people do.
Mindy Jensen: I don’t know why I’m coming up on a block there, but VICI, VC, VICI.
Eli Breece: Yeah, I talked to the CEO the other day, actually.
Mindy Jensen: Yeah, 6.9% yield. So I didn’t actually look up their stock price yet.
Eli Breece: Roughly $25, I think.
Mindy Jensen: Okay, so 7% yield according to this, $25 stock paying $0.45 quarterly. That’s a lot more understandable because I don’t have to— like, I could— what is $500 divided by 4? Or—
Eli Breece: I don’t want to do math live on air. Too scary.
Mindy Jensen: I don’t either. But like, I could get so many more shares of this, and there with a $0.45— like, $25 stock price, $0.45 dividend versus $500 stock price, $1 dividend.
Eli Breece: Yeah, well, I think different goals and different strategies. So to quickly answer the three stocks you mentioned: UPS, declining volumes, capital allocation doesn’t look good. Altria, a little bit better. Their payout ratio from a free cash flow perspective is sitting at roughly 80%, which management has actually stated is their target goal. Now, a lot of people will look at their return on invested capital, which I think was around 37-ish percent last year, and say, well, why are they not heavily reinvesting back into the business? Well, it’s because they’re reinvesting so little capital, it’s easy to generate a high return on invested capital. They’re using all their capital to pay out dividends and to buy back shares. So I think the dividend is a little bit stronger for Altria than it is UPS. They have a lot of pricing power, but they’re also seeing volume decline similar to UPS. Now, VICI is a unique scenario. Again, like I said, I talked to the CEO the other day. AFFO payout ratio for them, I think it’s 75% right now, which they’ve stated is their target payout ratio. That’s one I think is a little more compelling. The issue with VICI right now, the reason you’re seeing a mispricing potentially, is their two largest tenants make up about 70% of their rent roll, and they’re both about to go private. And so investors are going to lose visibility into rent coverage. So it’s pushed the stock price down, the yield has gone higher, but I think VICI is interesting at these prices. They have a lot of tenant concentration, but if we see risk with those top tenants, obviously that’s the primary concern. I hold VICI in my portfolio. I think it’s an interesting higher yielder, personally. Again, I think it depends on your goals. There’s absolutely those high-yield opportunities. So to give you an example, we run a model high-yield portfolio over on dividendology.com. One of the recent additions, we added Innovative Industrial Properties preferred shares, which at the time was trading at about $23 and yielding 10%, and it had 16 times dividend coverage. To me, that’s an incredible high-yield opportunity.
Scott Trench: I want to move away from these individual stock analyses because there’s a lot of different opinions out there about those, and you do a great job with that on your channel at Dividendology. And go back for a second here. What is the framework? Forget this company and their rate. Mindy and I, and I think many of the BiggerPockets Money listeners, will say, that’s not something you can do. Maybe you can do it, Eli. Maybe there’s a few people who spend a tremendous amount of hours doing it. But now you’re talking about analyzing companies specifically, their whatever, making projections about five to ten-year growth. Now I’m back to fundamental stock evaluation analysis, and that is not the academic case for dividend investing at the fundamental level. There’s a framework here, right? There’s a— here’s the starting yield and here’s the other conditions of the company. And in that situation, then you have a credible case which other people can beat up and defend and go against you for that makes it for growth investing. What is that box of a fictional company that would meet that criteria? How do I construct an index or a portfolio of these fictionally from scratch before I talk about Altria’s management?
Eli Breece: Well, here’s the irony of this. The perfect company would not pay a dividend. And in a world where we have infinite resources, they could reinvest to continue to generate high returns on capital and compound forever. And you would never have to worry about sequence of— you would never have to worry about distributions. But the reality is, Meta’s a great case study. Why do they pay out a dividend? And I know you don’t want me to talk about individual stocks. This is a good case study, but the reason they pay out a dividend is because they have finite resources. They’re generating so much free cash flow, they can’t intelligently reinvest it. What does an actual perfect dividend stock look like? If we’re talking specifically about dividend growth, typically you want to see the free cash flow payout ratio roughly in the 10 to 30% range. I would say you want free cash flow growing at double digits. The dividend will grow in line with free cash flow. You want to see a company that has pricing power. Pricing power is an indicator of a moat. You want to see what’s going on with the margins. What’s going on with the margins is an indicator of a moat, because ultimately we want to buy companies growing free cash flow at a high rate. Why? Because that’s what’s going to sustain the dividend growth over time. To really answer the question, if you want to make it as easy as possible, if you’re scared of the individual stock analysis, the framework that SCHD uses is following the Dow Jones U.S. Dividend 100 Index, which is the index we referenced at the beginning of this video. It’s the index that, over full market cycles, has outperformed the S&P 500. Now again, I don’t want to make it sound more glamorous than it is. It’s not going to outperform, particularly in raging bull markets like we’ve seen over the last four years. However, the dividend will continue to grow, and from a total return basis over full market cycles, it’s going to do very well. I don’t know if that’s detailed enough for what you were asking. The framework, it’s not yield-oriented. We do look for stocks paying those distributions for a total return basis and to eliminate sequence risk. It’s also an indicator that management believes free cash flow and the dividend will continue to grow in the future. If you’re asking me to peg down what the perfect stock looks like, I don’t know if I can do that, because I think it depends on a lot of variables and what the ultimate goals of the investor are.
Mindy Jensen: I’m a little hung up on you saying it’s not yield-oriented. If I am investing in dividend-paying stocks specifically to get the dividend, what am I investing for?
Eli Breece: Well, because you’re not buying the dividend today, you’re buying the dividend that’s going to pay in 10 or 20 years from now. In some cases, depending on your age, 30 years from now.
Scott Trench: How does that solve sequence of returns risk?
Eli Breece: Because the amount you receive in income grows every single year. If you’re living off the distributions, your income grows every single year regardless of what the value of your portfolio’s doing every single year.
Scott Trench: So the academic case for this comes from Michael Finke and David Blanchett. They said, do not target something with a 7 to 10% starting growth. Target a starting yield of 2 to 4%.
Eli Breece: Don’t target a 7 to 10% yield, or—
Scott Trench: Target a starting yield of 2 to 4% paired with an annual dividend growth target of 7 to— that was the first criteria. Second criteria is the free cash flow payout ratio that you just mentioned there, and they want that to be capped at 60% or less. So there’s a margin of safety. They want a longevity of dividend streaks over, I think it’s like 25 consecutive years or 10-plus years, like two cutoff points there. And they had diversification across 20 to 60 stocks, capping any single stock position at 5 to 7% of the portfolio. That’s the case that they made. How close is that to what you do in practice?
Eli Breece: I think that’s fairly close. They hit on a lot of things. I think 60 stocks is a little bit extreme, even for somebody that’s doing stock analysis every single day.
Scott Trench: Yeah, it’s 20 to 60 was their sweet spot, basically.
Eli Breece: I would stay to the lower end of that. Here’s what’s interesting: a 1% yield where the dividend growth is 20% in perpetuity, 30 years from now, is going to have a yield on cost substantially higher than a yield right now at 5% growing the dividend at 5%. So it’s what is your target? Maximize income date, for lack of a better term. If your target date is in 10 years from now, probably what they stated is pretty close to what you want to aim for. Target the yields of 2 to 4% that can maintain dividend growth, ideally at a rate slightly above inflation, maybe 5, 6, 7%. I would say for somebody with that type of time horizon, that’s the type of framework you would want to pursue. I want dividend growth at a rate much higher than that in my perfect world. So everything they stated, I think, is pretty close to what you would want to see if you’re looking to retire off dividends, particularly in 10, 15 years. Free cash flow payout ratio of 60% was very manageable, but you do have to watch closely what’s going on internally with the company. I would prefer it to be lower if you’re a longer-term investor, but I think that framework is pretty close to what she would want to aim for, for a lot of investors who are looking for a mix of yield and growth.
Scott Trench: In your experience, I guess the question is, how would you argue that this will actually work and continue to grow the dividend? Because obviously if I have a starting dividend and I grow at 7 to 10% a year, sounds great, but how do I assess the risk?
Eli Breece: I think this isn’t a question particularly just aimed at dividend investing. I think this is any type of investing, even outside of equities, right? You could say the exact same thing about real estate. You could say the exact same thing about growth. So I think particularly the advantage that dividend growth investing has is this is the most fundamental— and by fundamental I mean focus on the company’s actual fundamentals— type of investing that there actually is. You don’t care what the share price is tomorrow. In reality, we do, because it’s fun psychologically, right? But as long as the company is growing the free cash flow over time, they can continue to grow their dividends. I think the case studies you would want to look at are the dividend growth ETFs. Look at the holdings within DGRO. Look at the holdings within SCHD, which again, the Dow Jones U.S. Dividend 100 Index, the same index that we’ve been citing the studies from starting in 1998. Look at the holdings in Vanguard’s high-yield funds, which they say high yield— the yields really aren’t that high relative to what most people consider high yield. Let’s pull one up. If we look at DGRO, this is the iShares Core Dividend Growth ETF. Look at the top holdings in this. We have Microsoft as the top holding. We have JPMorgan Chase, Johnson & Johnson, AbbVie. You have to be careful with pharmaceutical stocks because future cash flows are pretty difficult to predict. So keep that caveat in mind. We have ExxonMobil, we have Apple, Broadcom, Procter & Gamble, Merck, Home Depot. Those are the top holdings. It looks like most of them are weighted at about 2 to 3.5%. Those companies, I think, people can feel very comfortable holding for the long term. You’re typically focusing on very established large-cap stocks with healthy balance sheets, reasonable payout ratios, and a runway for growth in the future. So if you’re looking to get started with this type of strategy, look at those holdings in the key dividend growth ETFs. But the short answer is your success isn’t guaranteed. It’s not guaranteed with any type of investing. So I’m not here to make this sound like some magic strategy where everything goes right. You undoubtedly have to make the right decisions, as with any type of investing.
Mindy Jensen: I am older than Scott is. I am 53, and I am looking to simplify my life after a very complicated investing strategy. And this sounds like it’s going to take up a lot of mental space, a lot of research, a lot of really learning. I mean, first of all, yes, it is going to, because I’ve never done this before, but who is best suited for dividend investing, dividend growth investing?
Eli Breece: I would say total return investors, with a 20-plus-year time horizon. I think the closer you get to what you would call your retirement date, you want to focus more on higher yield investments. This is, make no doubt about it, this is a long-term total return strategy. So I think the issue with the term dividend growth is people hear that term, hear the word dividend in it, and assume it’s more oriented towards people looking to maximize yield. It’s really the complete opposite in a lot of cases. Dividend growth doesn’t stop becoming important, is what I guess I’m trying to say, for somebody closer to retirement. I mean, if you’re living off the yield, you still need dividend growth to be in line with inflation. Otherwise, the purchasing power of your yield is being eroded every single year. So if you’re looking to simplify and pursue more yield, start with the Schwab US Dividend Equity ETF. Right now, the trailing 12-month yield looks like it’s sitting at about 3%. The 10-year dividend CAGR is 10.24%. Throw some REIT exposure in there—some Realty Income, Agree Realty—these REITs that are yielding 4 to 5% to boost your initial yield, and are growing dividends at a rate above inflation. There are some MLPs in there. There are some great energy companies with strong balance sheets who aren’t exposed to commodity price exposure, yielding 7, 8%, like Energy Transfer, like MPLX. So that’s a whole other discussion, but there are absolutely some phenomenal opportunities in the higher-yield space that still grow their dividend over time. So technically they qualify as dividend growth stocks because they’re growing dividends, but to me, dividend growth investing, more than anything, is a long-term strategy aimed at maximizing dividend income over the long term.
Scott Trench: The thing that I continue to come back to across this entire conversation is the use case for this is to reduce sequence of returns risk. That’s what you stated upfront.
Eli Breece: That is one of the—
Scott Trench: Okay. Is there another reason, or other reasons, to do it?
Eli Breece: Well, it’s a total return strategy, and it’s also historically had lower levels of volatility. We haven’t even touched on this, but there’s absolutely a huge psychological component to dividend growth investing. Hopefully investors aren’t looking at their portfolios every day unless they’re a hands-on investor, because if you look at the fund flows of ETFs during 2009, they were all pulling money out of their portfolio, which was the exact worst time to do that, right? So there’s a psychological component as well. But go ahead, Scott.
Scott Trench: Those are great reasons. And I think just the fundamental of, “I’m only comfortable spending the income from my portfolio,” is frankly an underrated reason to invest in certain things. I think there are lots of people who love the “I’m going to sell stocks, I can control my income” piece, and that’s great, and there’s a real case for it. And there are a lot of people who just won’t or can’t do that mentally. And I don’t like spending down the golden goose in my portfolio. That’s one of the reasons I own real estate, which produces yield that I then feel very comfortable spending, for example. So that was just my twist on it. If those are the reasons, how mechanically do I facilitate an early retirement? Do I sell—for example, you used SCHD, right? Which has a 1.96% dividend yield.
Eli Breece: Oh, SCHD, excuse me. SCHD is, I think, what I was referring to.
Scott Trench: What am I looking at? I’m sorry, I’m sorry—DGRO.
Eli Breece: Oh, okay, yes.
Scott Trench: That one has a 1.89% 12-month trailing yield on its dividend. Does that sound about right?
Eli Breece: Yep.
Scott Trench: Okay, so that’s at 1.9%. How mechanically do I support my spending at the 4% rule with a portfolio that has this as all or part of the position at that yield?
Eli Breece: Well, you should theoretically say your living expenses are—and I know it’s different depending on where you live, so everybody in the comments will be like, “that’s way too much,” or “that’s way too cheap.” But say theoretically your living expenses are, let’s make the numbers easy on me so I don’t look dumb, $50,000 a year. Obviously, what does that mean? Well, it means if you’ve got a $1 million portfolio, you need a 5% yield. On top of that, you need dividend growth to at least be in line with inflation for that to be sustainable. The reality is, I think you can spend the majority of your yield as long as your dividend growth rate is above the rate of inflation, because you can expect that the following year you have even more purchasing power relative to your portfolio last year. Again, this is why I keep hammering home the importance of dividend growth being above the rate of inflation, because in that same scenario I just mentioned, if your dividend growth rate is roughly 7%, which would be a good growth rate for a 5% yield, your purchasing power will increase substantially relative to what inflation did the following year—assuming that the inflation numbers we’re told and reported are accurate, of course, right? I know people like to make a big fuss about that. I think you can feel comfortable spending the majority of your yield. Everybody should have an emergency fund. I’m all for the simple Dave Ramsey type of financial management. You really don’t have to be too concerned with withdrawals. I mean, the income is growing, and it’s growing every single year. And when you have funds like DGRO, SCHD—probably even better from a retiree perspective—the income’s going to grow every single year.
Scott Trench: Let me rephrase my question here, right? Because it’s $50,000 in spend—perfect, okay, let’s start with that. That means that I need a portfolio of $1.25 million at 2%. I’m rounding up for DGRO here to 2%; it’s 1.89%, but I’m rounding up. 2% will generate $25,000 of the $50,000 in spending, right? You see where I’m going with this? How do I mechanically come up with the other $25,000 required to support my spending? The answer we have in the 4% rule is: here’s my stock-bond allocation, and I’m going to take my yield from my bonds, I’m going to take my dividend yield from my position, and I’m going to sell a small fraction of my principal, and that’s going to fund my lifestyle. And I’m going to do that periodically—monthly, quarterly, or annually—depending on my preference. I’m going to have a cash position. When you say this is going to eliminate sequence of returns risk—if it was above 4%, well, I don’t have an issue, you just spend the yield. But right now it’s at 2%, or below 2%, so how do I mechanically facilitate that as an early retiree to live on?
Eli Breece: Well, the issue with this is you shouldn’t be buying DGRO if your goal is to retire next year, right? You should have bought DGRO 10 to 20 years ago and let the yield on cost grow over time. You should be looking for a higher yield. So I see what you’re saying now, but the reality is, if you are in DGRO at that point, you need to reallocate towards more yield, and you’re going to get hit with a tax consequence, assuming you’re in a taxable brokerage. So I hate to say it, but I think that’s somewhat poor planning. Now, the caveat to that is, if you were in DGRO 10 to 20 years ago, by now your yield on cost is probably well above 4%, and your capital’s probably grown substantially. If you’re at that point and you still don’t have enough capital to manage a 2% yield, you need to reallocate towards funds where you can get 4 to 5%. So, for example, I mentioned David Bahnsen, I think, earlier in the video. TBG is an ETF that his company runs. They target about a 4% yield with fairly high levels of dividend growth. If you look at the trailing 12-month yield right now, it’s about 2.7%, but that’s because of the timing of the fund flows, which is getting way too nerdy for the scope of this video. But generally speaking, the yield is about 4%, with dividend growth at a pretty fair rate above inflation. That’s the type of fund you should probably be targeting for the most part.
Scott Trench: So it sounds to me like, in the world of dividend growth investing, you just need a bigger portfolio to support your lifestyle. And the advantage is you’re going to blow past your wealth number—the 4% rule concept—and you’re only going to spend the income. The golden goose never gets harvested. In many scenarios, it just continues to grow, allowing you more and more spending power over time. I think there’s a very attractive element to that. The reason I keep coming back to this is, I know we’re going to get beat up in the comments from people who are like, “well, that means I need a $2 million or $2.5 million portfolio instead of $1.25 million to retire on $50,000 in spend.”
Eli Breece: I’m not trying to defend a low-yield strategy when it’s time to retire. I’m not going to come in the comments and be like, “oh, you need more money, you need more yield.” You’re absolutely right. So you need to be pursuing the dividend growth strategy 20 years in advance, so your yield on cost is 20 to 30%, and you have more money than you know what to do with in retirement. Once you get to retirement, you need to be boosting your yield. You need to be looking for yield—sustainable yields that can be maintained and grow at a rate above inflation. I’m not trying to defend a low-yield strategy when it’s time to retire.
Scott Trench: Perfect. And I think that’s been the crux of where I’ve been asking questions and you’ve been pushing back across this episode—there’s a different worldview inherent in the way you’re building this portfolio. It’s not “I’m seeking to retire early at a defensible number,” it’s “I’m going to build a number such that I’m spending a minority of the cash flow produced by my underlying portfolio, and it’s always growing relative to inflation,” on the basis that there’s a really strong possibility that will always grow relative to my basis of my investment. I’m only going to spend that minority of the cash flow. And that’s a generational wealth and infinite investment approach, rather than “here’s how I get to my retirement number and last for the rest of my life with a very high probability of success as soon as possible.” Is that fair?
Eli Breece: So yeah, here’s the one thing I would add to that, and you might have alluded to it a little bit. The irony is that with where my portfolio’s at right now, I can achieve retirement quicker pursuing a dividend growth strategy versus a high-yield strategy. If I were to go all in on these 7 to 8% yielders that are going to see very little dividend growth over time, versus stocks yielding 2% growing dividends at 10%, with where my portfolio’s at right now, I’ll achieve financial independence quicker with a dividend growth strategy. So it’s very dependent on where you personally are right now.
Scott Trench: As I understand your position, if I invest in DGRO to execute the dividend growth strategy, the retirement plan is buy that and spend the dividend. You buy that for 25 years or whatever, but once the dividend is higher than my lifestyle expenses—yeah, that’s a pretty good argument.
Eli Breece: That’s pretty, pretty good.
Scott Trench: Yeah, okay, great. So here’s the challenge I see with that for the listener of this show. If you handed me $1 million in cash today and I wanted to spend $40 grand, I’d put it in the 4% rule portfolio and withdraw 4% a year using what I just talked about, right? And I have a 95% chance of success across historical periods. You can argue today’s valuations, whatever, but that’s how I’d do it. With your strategy, I’d need $2 million to generate a 2% yield. And that is the crux of my argument there, because now, yes, I completely agree you’re safer with $2 million spending 2% of it than $1 million spending 4%. No one’s arguing that. But you’ve just doubled my retirement FI number with this approach, as I understand it here, under those conditions.
Eli Breece: I would argue you don’t need capital, you need time. If you want your yield on cost to grow, if you’re going to utilize a dividend growth strategy, you need time, not capital. The dividend growth strategy is not an immediate yield strategy, and I’ve continued to concede this point throughout. Yeah, if somebody has $1 million and they’re like, “hey, I’m really excited, I hit a million, I only need $40,000 a year after Social Security,” I’m not going to point them to DGRO. They need more yield, and that’s the reality. And there are funds that grow dividends that have that 4% yield, like I mentioned, TBG. But yeah, no, you’re right, I’m not trying to disagree with you on that one.
Scott Trench: Okay, so then help me understand—is your argument that, let’s say I’m starting today and I’m going to invest $1,000 a month, and I want to build the most wealth I can over the next 25 years, that’s your argument for dividend growth, and I put that in dividend growth—how does that compare to the index?
Eli Breece: It depends. Over full market cycles, like we said, dividend growth has historically outperformed over about a 50-year time period. That’s what the Hartford Funds study has shown us. The caveat to that is that outperformance, like I said, has come during bear markets. So if we’re just in the golden age of AI and we remain in literally the best investing period of all time over the next 20 years, the index is going to do well. But if we do get a ’09 pullback, if we get a dot-com bubble pullback, if we get an ’87 pullback, dividend growth investing is going to become the most popular investing style of all time. Yeah, no, I think in a bull market environment, dividend growth will probably see slight underperformance in a lot of cases.
Scott Trench: Okay, so is it fair to say that you’re saying, if you’re starting today and want to build wealth long-term that you can retire on, if you start with a dividend growth investment approach and you just buy in continuously like that for the next 25 years and you reinvest the dividends during the accumulation period, you will have roughly double the portfolio of the index under today’s starting conditions?
Eli Breece: Double’s a lot. The annualized return of the study I cited earlier for the Dow Jones was 11.17%, while the S&P 500 was 8.85%. The cumulative return of the Dow Jones—I have the numbers in front of me, I’m looking at it now—was 1,758%, while the S&P 500 was 940%. So it did outperform by quite a bit, but telling someone they’re going to double their performance, I wouldn’t feel comfortable saying that. That’s quite a bit of outperformance. Predicting 20 to 30 years out into the future is just not—I couldn’t make a statement like that. That’s a little too aggressive of a prediction. But I do think for full market cycles—that’s the key term, full market cycles—you will likely outperform.
Mindy Jensen: Need a flat fee or hourly financial advisor who actually understands FIRE? Scott and I built a list of FI-friendly professionals to help you on your FI journey, and we’re constantly vetting and adding new pros to the list. Find yours at biggerpocketsmoney.com/fipro. That’s biggerpocketsmoney.com/fipro.
Scott Trench: And do you have anywhere people can look for answers to what starting withdrawal rate I can use as a retiree in dividend growth investing?
Eli Breece: I don’t recommend a withdrawal rate for the dividend growth strategy. You can absolutely use a combination, but you’re going to need to do a little financial modeling to back into how much you’re taking of the yield, or how much you’re withdrawing. Are you reinvesting the dividends and still withdrawing a certain amount? I would really target a yield on cost—get your dividends above your cost of living, and make sure your dividend growth rate is above the rate of inflation.
Scott Trench: I think that’s where this discussion needs to conclude here—it’s just a different worldview that I’m, you can tell, just struggling to wrap my head around. Because to me, I’m hearing you say that, and I’m hearing, “well, then I need double the terminal portfolio in order to sustain my cost of living on a 2% dividend yield.” And you’re saying, “that’s not how I’m thinking about it at all, Scott. I’m thinking about it as a long-term growth play.” And yes, I’m going to get this portfolio to be—so the dividend yield is above that. I don’t care what the price of the underlying assets are. In today’s world, yes, it would need to be twice. But that’s not how I’m even really conceiving of the problem. I’m just conceiving of it as a cash flow net to me—dividend payout that I’m then spending—and that’s how I’m going to fund my life. Is that the right way to think about it?
Eli Breece: To be honest, I don’t know if we’re 100% on the same page, Scott, because I don’t think you need double the portfolio. We’re focused on growing our yield on cost over time, which some people say is a vanity metric. But ultimately, we’re just looking to get our dividends at a point where it’s above the cost of living, and your portfolio won’t have to be double the size to make that happen. Just as a rough example—we associate the stock price sometimes with performance in the short term. That’s not always the case. In the long term, it typically is the case, right? But if over a 5-year period a stock’s share price goes nowhere, but the dividend doubles, the amount of capital you need to live off dividends with the dividend growth strategy is substantially less than with the 4% rule. So maybe that last example gives a little more clarification. But yeah, Scott, I’ve really appreciated you having me on the show today.
Scott Trench: Yeah, absolutely. Okay, one last try here. What we can agree on is the ratio of the dividend payout to my portfolio size is the big difference-maker here.
Eli Breece: Define—what do you mean by ratio?
Scott Trench: Like the dividend rate, like the payout.
Mindy Jensen: The yield.
Eli Breece: Yeah, the yield of your portfolio.
Scott Trench: If I want to spend $100 grand and I’ve got a 2% dividend yield, I need a $5 million portfolio, right?
Eli Breece: Yeah, you don’t want that to be your yield. I’m not arguing the case for low yield in a retirement scenario.
Scott Trench: I think I’m just still stuck, Eli, on—I think that the argument for dividend growth investing for an early retiree is a fundamentally different framework than the traditional retirement research we’ve talked about, and it’s just about getting your dividends over your cost of living. And in today’s environment, that means you have to have a much larger base, because the dividend yields on most stocks are so much lower than they usually are, because of perhaps inflated valuations or just where the market is right now. In other market situations, that may not be the case—you may need less wealth because the payout ratio is much higher and you’re getting a 7 or 8% yield. Is that the right way to understand it?
Eli Breece: I think we’re close.
Scott Trench: Okay, fair enough. Eli, where can people find out more about you and learn more about Dividendology?
Eli Breece: Yeah, so you can either subscribe to the YouTube channel Dividendology, or go to dividendology.com and sign up for the newsletter. These are strategies we discuss frequently. We dive deeper into high-yield and dividend growth opportunities. But Scott and Mindy, thank you so much for having me on the channel. I really appreciate it.
Scott Trench: Thank you, Eli.
Mindy Jensen: Eli, I appreciate your time and I appreciate you explaining this strategy. When somebody has a 20-year timeline, maybe this is something they could look into. I don’t know that all of our listeners have the 20-year timeline. They’re looking to retire early, but some of these stocks that we discussed today, I’m going to take a deeper dive into.
Eli Breece: Yeah, yeah, I definitely would point them to a higher yielding strategy, but again, I appreciate you guys taking the time today.
Scott Trench: Awesome. Thank you, Eli.
Mindy Jensen: We’ll talk to you soon. All right, Scott, that was Eli Breece from Dividendology talking about dividend growth investing. I’m curious what you thought.
Scott Trench: I remain completely unconvinced that this is a good strategy for the financial independence community. Frankly, I think that the use cases for dividend growth investing to me appear to be, one, in the accumulation phase, and I need to go back and look, but I’d want to see a dataset that said, given this set of criteria on entry across this historical time period, this outperforms by this much. I do not want to see, in 1999 this strategy outperformed by this much in these situations, and that kind of stuff for a long-term dividend growth approach. So I think that’s one. Two, the strategy appears to be spend the yield that comes into you. And if today’s index-wide yields for indexes like SCHD, which I mistakenly called SHIELD because it looks like kind of SHIELD—so if the dividend yield for SCHD is 3.05%, and I want to spend $100,000 a year, right, so $100,000 divided by 0.0305 means I’m going to need $3.2 million in order to sustain an early retirement, versus if I go with Bill Bengen’s research and use a 4% withdrawal rate, I’m going to need $2.5 million. So that’s the first question I have—there must be another reason to build the dividend growth portfolio, perhaps because I want to balance more of my long-term wealth. I like the psychology of never spending the golden eggs. I want my portfolio to have a better chance to grow long-term, and I’m only comfortable spending the cash flow. Those are good reasons to me, but it’s a fundamentally different approach. The math we’ve talked about with other folks does not seem to support that. And the second part is, if the goal is to accumulate, well then I have the same problem. It means I have to accumulate far past my 4% rule number in order to retire early, and therefore I would hope to have better accumulation. So that’s the problem I’m seeing with the dividend growth investing piece. That said, it may work out better than, for example, owning real estate paid off the way I’m doing it, or other strategies out there. I just—I’m not sure I still grasp the academic argument for why I’d want to go with dividend growth investing rather than other types of investing, like factor tilts for small-cap value. If you think valuation and cash generation are a big metric, why is dividend investing in particular? I don’t think that’s yet well defended in my mind. And so that’s why I remain unconvinced, despite some of the great arguments we heard from Eli today.
Mindy Jensen: As I understood him to say, the dividends increase over time, so they’re not just paying out 3% today. For you to do SCHD today, you would need—what did you say, $3.2 million or whatever—in order to live off of those. But what I understood Eli to say is, in the past, maybe SCHD was only paying 1%, and then it gradually increased to like 1.5%, and then 2%, and then 2.5%, and now it’s 3.05%. These are obviously numbers that I just made up for illustrative purposes. But I gather that the amount that you will totally invest and have it grow will be smaller than the amount that you would need to invest in your traditional 4% rule. But I didn’t understand how you could extrapolate that information and predict how big of a portfolio you will need, because you can’t predict how much they will increase their dividend. So for that reason, I remain unconvinced that this is a good strategy for people pursuing financial independence, or people pursuing FIRE. The RE stands for retire early. You don’t generally have a 20-year timeline in order to pursue this. If your goals are different, maybe dividend growth would be a great strategy. And then go check out Eli’s channel, Dividendology, because he can tell you more about this and talk about the specific stocks.
Scott Trench: I think for me to be convinced, here’s the conditions that I would need to have proven to me, and maybe somebody in the comments will help me out here. But first, I’d want to see that during the accumulation phase, I’m going to get better total returns, net of dividends reinvested, using a dividend growth investment strategy. So that’s criteria one. And then criteria two is that when it is time to switch to a retiree portfolio, I’m going to get some combination of better returns or spending returns, right—a higher floor, higher ceiling. And I think that where I can say, here’s what makes sense to me from dividend growth investing, is because I’m withdrawing at a lower rate, right, I’m only spending the yield, I’m more likely to have a rising floor of spending across my time period and end with more terminal wealth than if I withdrew at the 4% rule. But here’s my problem with that—this is why I’m continuing to be unconvinced. If I just used the traditional retiree portfolio and spent 3.05% of that, would I be better off than the dividend growth approach? And to me, that’s the question that still is unanswered here. If the answer is dividend growth is going to require you to just spend your yield, it’s going to be lower than the 4% rule. That’s fine. But now you’re making a different argument—at that withdrawal rate, what is the most optimal portfolio? Is it this dividend portfolio or something else? And so to me, that continues to remain unproven. And for now, I walk away from this conversation today thinking the case for dividend growth investing is for the psychology of being able to spend the golden eggs and never having to harvest the golden goose and sell shares in my retirement portfolio. There’s a psychological argument for that that I buy. What do you think, Mindy?
Mindy Jensen: I can see your point. I just remain unconvinced that dividend investing is the way to go for the FI community. Well, fair enough.
Scott Trench: Let us know if you agree, disagree, invest in dividends. I’m sure that there are winners within the dividend growth framework. I’m sure that there are plenty of companies in there. I’m sure there are great stories of returns, and I’m sure that there are companies that will continue to produce great returns in there. I just don’t think I can pick them.
Mindy Jensen: Yeah, exactly. I might dabble in some—like we talked about UPS. I know UPS, I understand their business model. There are other companies that I either don’t want to invest in, their business model, or I don’t understand it. I don’t mind putting a couple of dollars at it and seeing what happens over the course of several years. But I don’t think I’ll be changing to a dividend growth strategy anytime soon.
Scott Trench: What should we get out of here, Mindy?
Mindy Jensen: All right, Scott, as always, you can find all of our awesome show partners at biggerpocketsmoney.com/fipro. And we are BiggerPockets Money on YouTube, Facebook, and Instagram. And don’t forget, we also have a website, biggerpocketsmoney.com, with a ton of free resources to help you on your journey to FI. All right, that wraps up this episode of the BiggerPockets Money Podcast. He is Scott Trench. I am Mindy Jensen saying, gotta scoot, newt. Finding a financial professional who truly understands financial independence isn’t easy. That’s why Scott and I created the FI Friendly Professionals List. This is a curated network of CFPs and tax professionals who understand the FIRE mindset, early retirement, and wealth building. We’re adding more vetted experts all the time. Find someone who speaks your FI language at biggerpocketsmoney.com/fipro. That’s biggerpocketsmoney.com/fipro.
