🧦 Coal in Your Stocking?
FIRE BTC Issue #13: Why dividends don't matter
There are a number of accounts on X that advocate for achieving financial independence through investing in dividend-paying stocks. The logic is that cash flow is king, and that a portfolio that pays enough in dividends to cover your expenses gives you hassle-free freedom.
Fair enough, at least on the surface. But there are a lot of drawbacks to this approach that are not discussed.
It also just so happens that these “dividend bros” tend to be against bitcoin. Most of it is engagement farming, and of course they focus on the fact that bitcoin doesn’t pay a dividend.
Exhibit A:
While passive income from dividends can help cover expenses in retirement without having to sell down your savings portfolio, they actually provide a drag when trying to reach financial independence in the first place.
🔢 Total return
On the surface, dividends seem like free money, but they come with a trade-off.
When a company pays a dividend, the stock’s price drops by the dividend amount. For example, if a stock trading at $50 pays a $1 dividend, it opens at $49 the next day. Why? Because the company’s value has decreased by the amount of cash distributed.
Total return = capital gains + dividends. Dividends don’t increase the value of your investment—they simply shift money from the company’s account to yours.
Worse yet, dividends create a tax drag in taxable accounts. You owe taxes on the dividend income, whether you reinvest it or not. This reduces the compounding power of your portfolio.
Dividends don’t build wealth any faster than growth-focused investments. In fact, the tax inefficiency of dividends often means they build wealth for you more slowly.
⚖️ Dividend stocks vs. VTI
Let’s compare a popular dividend ETF (SCHD) with VTI to see how their total returns compare.
I used a total return calculator for the time period starting at the end of December 2019 through December 23, 2024. Here are the results:
As you can see, a $1,000 investment in SCHD produced a lower total return over this time period than VTI.
The total return for SCHD came in at 69%, which is >11.13% annualized.
For VTI, the total return produced was 93%, which is >14% annualized.
That is a HUGE difference that would lead to YEARS of extra saving required to reach your FIRE number. This doesn’t include the taxes you’ll need to pay on the dividends you’ll receive along the way, which further adds to the drag.
While this is only one example, it’s meant to prove the point. Focusing on dividend stocks is not ideal if your goal is to reach FIRE more quickly.
🤷♂️ Missing the point
Criticizing bitcoin for not paying dividends completely misses the point.
Bitcoin doesn’t throw off dividends because it is akin to cash money. It doesn’t have earnings or cash flow from which to pay a dividend.
The yield received from bitcoin is driven from its increased purchasing power over time.
Further, while dividends are one way to realize returns on an investment, they aren’t the most efficient. As FIRE practitioners, we should opt for higher total returns to reach financial independence more quickly. If chasing dividends gives you more cash flow, but it comes at the expense of lower total returns, you are opting for a harder/longer FIRE journey.
Cash flow from your job or business should be the primary mechanism for covering expenses before reaching FIRE. Then, any excess savings should be funneled to assets that produce the best total return, not cash flow.
After reaching FIRE, you have the option of moving assets to lower-return assets, like dividend-paying stocks, if you’d prefer to have cash flow without selling stocks. Then again, the same dynamics that lead to lower total returns with dividend stocks don’t just magically disappear once you reach FIRE. So in my mind, you might as well keep the same better-performing allocation and opt for continuing to build wealth more quickly.
Whether bitcoin or VTI, you can sell small portions as needed to create an income stream. This approach allows for better tax efficiency and greater compounding potential.
By holding bitcoin and benefiting from its massive growth, your total return can far exceed the steady drip of dividends from stocks.
To reach FIRE, what matters most isn’t how returns are delivered—it’s the total return and how well your savings portfolio compounds over time. Dividends may feel like an easy win, but they can come at the cost of lower overall growth and a longer time to reach financial independence.
That’s it for this week. Thanks for reading!
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Until next week,
Trey ✌️