The Patient Investor

Should You Depend on Dividend Stocks? Part 2: Dividend Stocks vs. Total Return Investing

In Part 1 of Should You Depend On Dividend Stocks? we described why dividend investing—or, buying up stocks known for attractive dividends—may not be an ideal strategy for generating a dependable income stream out of your investment portfolio.

In this blog, we’ll look at why we typically prefer a total return investment strategy over more concentrated dividend stock portfolios in many circumstances, including retirees who are drawing income out of their portfolios. Here are two questions for homing in on a more comprehensive way to build and spend your lifetime wealth:

1. Investing: As you invest and accumulate wealth over time, how can you pursue a potentially higher total return over time, given the level of market risk you can tolerate?

2. Divesting: As you take income out of your portfolio, how can you maintain its risk-managed structure, while generating tax-efficient withdrawals over time?

Where dividend investing can fall short on these pivotal counts, total return investing is structured to directly address them, head on.

How Does Total Return Investing Work?

Bottom line, there are essentially three ways any given investment can reward investors:

1. Interest/Dividends: A security can pay out more or less interest or dividends.

2. Capital Appreciation: A security can offer higher or lower capital gains or losses (based on how much you pay per share versus how much your shares are worth when you sell them).

3. Cost Control: As you buy and sell your holdings, you can incur more or fewer taxes and other costs that eat into your returns.

Instead of seeking to isolate and maximize dividends as a single solution, total-return investing seeks to make best use of all three of these potential money-making tools as they apply to you, your investment opportunities, and your personal financial goals.

Total return investing offers more flexibility for pursuing overall expected returns within your risk parameters—regardless of where those expected returns come from.

Also, dividend investing limits you to investing in no more than about 40% of all publicly traded stocks. With total return investing, we can consider the entire universe of available stocks.

As we’ll see next, evidence suggests this is an important differentiator.

Evidence-Based Underpinnings

Total return investing is grounded in decades of academic evidence identifying the stock market’s sources of expected returns. These include investing in stocks versus bonds and incorporating return factors such as company size, book value, and profitability.

The research shows: Whether or not a company pays out dividends is NOT among these identified return factors. We’ve known this since at least the 1960s, when Nobel laureates Merton Miller and Franco Modigliani published their landmark study, “Dividend Policy, Growth, and the Valuation of Shares.” They found, if you omit external factors such as trading costs and taxes, investors should be indifferent to whether companies distribute shareholders’ profits as capital gains or dividends.

In a recent VettaFi Advisor Perspectives piece, Larry Swedroe of Buckingham Wealth Partners revisited this conclusion with his own analysis of four popular dividend-appreciation ETFs. He looked at whether they outperformed their counterparts after accounting for the types of investment factors that drive expected returns. Swedroe concludes:

“Be skeptical of strategies that conflict with economic theory. Even without considering the negative tax implications of a dividend-paying stock … investors are better served by directly targeting factor exposures in their portfolio rather than using a dividend screen, which reduces the investable universe significantly.”

The Benefits of Total Return Investing

As total return investors, we can still draw from and make best use of available dividends and interest. Because, on a purely rational level, a dollar is a dollar and a return is a return, no matter how it’s paid out.

But whenever it may make more sense to do so, we can also sell positions to generate income. We can also prioritize managing an investment portfolio and income withdrawals as cost- and tax-efficiently as possible, without having to maintain a dividend-stock exposure.

By building from this position of strength, you can pursue the outcomes that make the most sense for you. Would you like to have more income to spend in the end? Experience less market volatility along the way? Create a balance between growth and stability? Total return investing may give you more ways to mix and match the pieces of your portfolio. In fact, most total return portfolios still include dividend stocks; they’re just no longer a central pursuit.

Portfolio Management

Total Return Approach

We seek to optimize your exposure to the capital available from global stock and bond markets by building a personalized portfolio, invested across risk-managed, global sources of expected returns. Income is then withdrawn out of your total returns, with an emphasis on maximizing efficiency and minimizing costs.

Dividend Investing

Dividend investors seek to draw their income from a concentrated position in stocks (or stock funds) with a past history for distributing dividends.

Concentration Risk

Total Return Approach

To curtail unnecessary risks related to overly concentrated stock positions, we invest in funds that offer broad diversification within and across the types of investments you’re holding.

Dividend Investing

Loading up on stocks that happen to have been paying dividends erodes rather than augments your ability to diversify away excess concentration risk.

Tax Management

Total Return Approach

We emphasize tax efficiency as you invest and spend your wealth. For example, we’ll locate your diverse investments across taxable and tax-sheltered accounts as appropriate, and withdraw income wherever and however is expected to be most tax-efficient over your lifetime.

Dividend Investing

Dividend investing limits rather than enhances your ability to control when and how your income stream will be taxed over your lifetime, as well as where your most tax-efficient income holdings can be managed.

By concentrating on dividend stocks, investors are inadvertently investing in a byproduct of the market’s actual sources for expected returns. Why not invest directly in these sources themselves? By focusing on your portfolio’s total return as the horse that drives your proverbial cart, we believe we can better manage expected returns, and position your portfolio to generate efficient cash flow when the time comes. 

Stay patient, my friends.



Learn more about Eric Hutchens


Hello! I’m Eric, the president and chief investment officer at Allodium Investment Consultants, located in Minneapolis, MN. I am dedicated to helping clients achieve their unique goals through designing tax-efficient investment strategies and comprehensive financial planning.  In my spare time away from the office, I enjoy relaxing at my cabin in northwest Wisconsin with my wife, two sons, and two rescue dogs. I have also volunteered with my church, serving on the elder board and as a youth group leader.


The information provided is for educational purposes only and is not intended to be, and should not be construed as, investment, legal or tax advice. Allodium makes no warranties with regard to the information or results obtained by its use and disclaim any liability arising out of your use of or reliance on the information. It should not be construed as an offer, solicitation or recommendation to make an investment. The information is subject to change and, although based upon information that Allodium considers reliable, is not guaranteed as to accuracy or completeness. Past performance is not a guarantee or a predictor of future results of either the indices or any particular investment.