My mother-in-law, who I love, is invested in a portfolio primarily of dividend paying stocks because she believes it is safer to live off the income generated by the dividends and interest income generated by her bond portfolio rather than dipping into and spending down the principal, that is, her investments, and I'm here to tell you that, frankly, I just don't agree with that.
I believe a total return portfolio, that is, a portfolio that generates some income, but also is growing over time, is the better way to go. First of all, the capital gains generated by higher growth, smaller companies, when you sell the stocks of these companies, you will pay a lower capital gains rate rather than paying taxes on interest income and dividends generated by your portfolio, which frankly can be taxed at your higher ordinary income tax rate.
Another thing, frankly, is that a portfolio focused on dividend paying stocks will be a less diversified portfolio. That is, you are likely to be primarily invested in banks and utilities, slower growing, larger US based companies, and I think it's important to own a portfolio that's in larger company stocks, smaller company stocks, slower growing stocks, higher growing stocks, let alone stocks of companies internationally, as well as in emerging markets.
And finally, when you're focused primarily on generating income, you have the risk of reaching for yield that is, buying companies that have higher dividends, and often this is a reflection of the fact that these companies aren't doing so well. Actually, the, the market is questioning whether these companies will continue to pay the dividends, and that's why they're so high right now.
Now I know I just threw a lot of information at you and this may be confusing. So please, if you have any questions, please don't hesitate to put them in the comments below or to reach out to me at firstname.lastname@example.org. I am Laura Rotter of True Abundance Advisors and I urge you to invest with purpose.