When most people think about earning income from their investments, dividends are often the first thing that comes to mind. After all, who doesn’t like the idea of getting a regular “paycheck” from their stocks? But as the investment landscape has evolved, so have the ways companies reward their shareholders—and the ways investors can generate income.

What Do Companies Do With Their Profits?

Every year, companies face a choice with their earnings:

1. Reinvest in the business (think new products, expansion, or research),
2. Pay out some of those profits to shareholders as dividends, or
3. Buy back their own shares (known as share repurchases or stock buybacks).

Back in 1970, nearly 7 out of 10 companies paid dividends. Fast forward to 2024, and that number has dropped to just 38%. But here’s the interesting part: when you combine dividends and share buybacks, the total cash returned to shareholders (relative to company earnings) hasn’t really changed. Companies are just using different methods to reward investors.

Why Do Investors Love Dividends?

Dividends are popular for a few reasons:

• Income: They provide a seemingly steady stream of cash. But here’s the catch—investors don’t control when or how much is paid. Companies make that call.
• Perceived Stability: Dividend-paying stocks are often seen as more stable, but that’s not always the case.
• Belief in Higher Returns: Some think dividend stocks outperform, but that is not necessarily true. When a company pays a dividend, its stock price typically drops by the same amount. The value isn’t created out of thin air.

Total Return: The Bigger Picture

Instead of focusing solely on dividends, it’s smarter to look at your total return—how much your investments grow, including both price appreciation and any income received. This approach gives you more flexibility. Need cash? You can generate it by selling a portion of your investments, not just by waiting for dividends.

Tax Considerations

Dividends are often taxed as income, while selling investments (especially after holding them for a year or more) can result in lower capital gains taxes. By taking a total return approach, you have more control over when and how you realize income, which can be a big advantage at tax time.

Don’t Limit Your Options

Focusing only on dividend-paying stocks can limit your diversification. With fewer companies paying dividends today, you might miss out on great opportunities—think of companies like Berkshire Hathaway or Tesla, which have never paid a dividend, or Microsoft, which did not pay a dividend until decades after its founding.

And while dividend payers tend to be less volatile than non-dividend payers, they’re still stocks, and subject to the ups and downs of the market. If you want truly lower volatility, bonds or other fixed income investments are a better bet.

A Better Way to Build Your Portfolio

Rather than chasing dividends, consider a diversified portfolio that includes a mix of profitable companies—whether or not they pay dividends. Focus on quality, value, and long-term growth. This approach can help you achieve your cash flow needs, manage taxes more efficiently, and keep your investment options open.

At Barton Financial Group, we help busy professionals like you design portfolios that work for your whole life — not just for the next dividend check. If you’d like to talk about how to generate income from your investments in a way that fits your goals, let’s connect.