Why Dividends Matter

Stock markets have been soaring to new heights this year and while capital gains are great, let’s not forget why dividends matter.  No doubt, many people will be pleased when they open their monthly retirement account statements and see the dollar value of their investments.  But how much income did their investments generate over the month?  Ultimately, what matters most is not necessarily the dollar value of our investments.  It is the income – ie. the cash deposited into our accounts – that matters most.

Dividend Income vs Account Value

I’m reminded of a quote from investing legend Jack Bogle who said:

“Investors make a big mistake by thinking too much of the value of the account and not enough about the monthly income they want to get.  We could have a significant decline in the market with dividends unchanged.”

Bogle is exactly right.  Making retirement decisions, or even decisions about our financial well-being, that are based solely on the dollar value of our investments at a given point in time is dangerous.  The stock market could roll over tomorrow and suffer a huge crash.  Then what?

I remember during the tech crash of 2000 and again during the global financial crisis of 2007-2009 that some of my older co-workers had to delay their retirement for as long as 5 years because they simply couldn’t afford it.  Their investments had suffered a huge decline in value and it changed everything for them.  They based their retirement on the dollar value of their investments rather than the income that those investments paid.  Had they focused more on their investment income, the crash would have had less of an effect on their retirement plans.

Dividend Income is More Stable    

It’s much more prudent to focus our attention on the dividend, interest and other income that our investments generate.  The main reason being is that investment income tends to be more stable and less subject to the wild fluctuations of the stock market that influences the dollar value of our investment accounts.

To be sure, dividend income is not always guaranteed.  That said, a large number of solid blue chip companies managed to navigate through the big stock market crash of 2009 without cutting their quarterly dividend payment.  It’s also no coincidence that many of the solid, stable, dividend-paying stocks were among the first to recover after the crash.

Nothing Beats Monthly Cash Flow

To sum up, dividends matter and are extremely important for our retirement plans, even if many people choose to just focus on the dollar value of their retirement accounts.  Dividend investing is definitely not overrated as some people have suggested.  In fact, studies have shown that about half of all investment returns have come from dividends.  So that’s definitely not something to ignore.  

Dividend income is a very important component of my retirement plan, which is why I track it each and every month.  My focus has always been on growing a reliable stream of monthly dividend income that will be the foundation of my retirement.  I’ve always maintained that Cash Flow is much more important than our net worth or the dollar value of our investments as those things can change in the blink of an eye.

Thanks for reading this post on why dividends matter and check out my MUST READ page for other investing articles.

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