The investment world is constantly changing. In 1917, U.S. Steel was the largest U.S. stock, followed by American Telephone & Telegraph1; today, it is Nvidia, followed by Microsoft2. Often, these changes in the largest companies are for the better, with technological advances and new firms emerging from the garages of innovative thinkers. These are typically noticeable variances. Alternatively, some things change that we don’t notice, and, as a result, investment advice doesn’t evolve to reflect those changes. I want to focus on the potential problems with a dividend-focused portfolio. The core point to consider is that dividend yields change quite often and, at times, quite silently. Some of you may have noticed how dividend yields have changed — sometimes drastically —over the last 2-3 decades, and some of you may not have. If only we had known how great those dividend yields were back then.
What changes have we seen in the dividend yield? If we look at the S&P 500®, the average annual dividend yield from 1950 to 1987 was 4.08%3. The average from 1988 to 2025 was 2.02%3. That is almost exactly half. Why should an investor pay attention to that? Many investment articles preach the virtues of a dividend-focused portfolio and living off dividends. That sounds nice, doesn’t it? Hypothetically, let’s say you needed $40,000 a year for living expenses and could get the 4.08% dividend yield from 1950-1987, your portfolio would need to be $979,100 to earn $40,000 strictly from dividends. Now, let’s say you could get the 2.02% dividend yield from 1988-2025. Your portfolio would need to be $1,974,000 to earn $40,000 a year strictly from dividends. As you can tell, this is a drastic difference in portfolio sizes.
What happens if I have a dividend-focused portfolio? A hidden factor many people don’t consider when building a dividend-heavy portfolio is total return. Let us look at SPYD vs. SPY. SPYD is the SPDR® Portfolio S&P 500® High Dividend ETF and SPY is the SPDR® S&P 500® ETF. In short, SPYD is a dividend-focused version of SPY. Right now, the yield of SPYD is roughly 4.5%3, getting you back to a dividend yield from the good old days.
What is total return? Total return takes into consideration the change in the value of the investment along with the dividend yield. In short, it gives you what the name suggests, total return. Now, let us look at the past few years of total returns for SPDR® S&P 500® ETF (SPY) and SPDR® S&P 500® Dividend ETF (SPYD).
As you can see, returns can vary significantly. Having a portfolio that is strictly focused on dividends may leave you with a value-oriented portfolio that requires the market to be in favor of value. A 5.5% annualized underperformance from 2016 to the 3rd Quarter 2025 is a cumulative difference of 147% in just shy of 10 years all because you decided to focus on dividends instead of total return.
How is portfolio income taxed? Another critical issue that often gets overlooked is taxes. In a dividend-focused portfolio, the income you receive isn’t all treated the same. There are two main types of dividends, and the difference is crucial for your tax bill. First, you have qualified dividends. These are the most common type from U.S. stocks and certain foreign companies. They receive favorable tax treatment and are taxed at the long-term capital gains rates, which are currently 0%, 15%, or 20%, depending on your overall taxable income. Then there are non-qualified dividends. These are taxed at your higher ordinary income tax rates, the same as your salary. If you’re building a portfolio to live on the income, you must be aware of how much of that income will be non-qualified, as it can significantly increase your tax liability. A key drawback here is that you have no control over when you receive this taxable income; the companies decide the payout schedule.
Now, let’s contrast that with a total return approach. When you need cash, you generate it by selling a portion of your investments. The tax treatment here depends entirely on how long you’ve held the investment. If you’ve held it for one year or less, the profit is a short-term capital gain and is taxed at your ordinary income tax rate. If you’ve held it for more than one year, the profit is a long-term capital gain and is taxed at those same favorable 0%, 15%, or 20% rates.
What advantages are there of total return? The most significant advantage of a total return approach is the combination of control and strategic flexibility. While the tax benefits are a key part of this, the advantages for managing your actual portfolio are just as powerful. Investing is forward-looking, and your outlook on a company or an entire industry can change. With a total return strategy, you can act on those changes. If you’re no longer optimistic about an investment’s future, you can trim the position or sell it entirely and reallocate that money to more promising opportunities. This allows you to actively manage risk and adapt to new information.
In contrast, a strict dividend-focused portfolio can be much more rigid. You might find yourself holding onto a stock simply because it pays a good dividend, even if its growth prospects have faded or its fundamentals are weakening. The dividend becomes the reason to own the stock, rather than its potential for future growth.
Ultimately, a total return strategy allows for a more holistic and forward-looking portfolio. It’s built by selecting a diverse mix of investments based on their expected risks and returns. A dividend-only approach, while often comprised of quality companies, filters the investment universe based on a single characteristic. This can lead to unintended concentrations, such as a heavy tilt toward value stocks, and may cause you to miss out on excellent companies in high-growth sectors that don’t currently pay a dividend. By focusing on overall return, you gain the flexibility to build a truly diversified portfolio that evolves with the markets and your financial outlook.
Let’s stop thinking in terms of dividend yield for our portfolios and shift our focus to overall return and a balanced portfolio. Strive for a portfolio that delivers the highest total return for your given risk level. It is less likely to get a dividend yield high enough to live off the income. Even if you can get a portfolio to have a high enough dividend yield, you are still taking on an unforeseen risk. As factors change in the investment world over time, so should your portfolio. Having a dividend-focused portfolio might not be as beneficial as once thought.
Citations & Disclosures
- https://www.forbes.com/sites/jeffkauflin/2017/09/19/americas-top-50-companies-1917-2017/
- https://companiesmarketcap.com/usa/largest-companies-in-the-usa-by-market-cap/
- Morningstar
Past performance is no guarantee of future returns. Performance discussed represents total returns that include income, realized and unrealized gains and losses. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any types of securities and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees and expenses.
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| INDEX | INDEX DESCRIPTION |
| S&P 500® | Represents US Large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ |
| S&P 500® Dividend | Represents the performance of the top 80 high-dividend-yielding companies within the S&P 500® Index |