Dividend Investing vs Index Funds: Which Is Better for Financial Independence?

21:32At the time, it was yielding roughly 8.5%. And, you know, MLPs have been a great sector to be in this year, obviously. We've benefited from some unforeseen circumstances, undoubtedly, in the energy space. But management over the last two to three years has guided towards 12.5 % distribution growth. That's hard to beat from a dividend growth perspective, getting the 8 % starting yield with that level of distribution growth. Now, I don't think future cash flows are as predictable as, say, a Microsoft Broadcom Visa. So that's the caveat to that. Maybe you can project cash flows out three or four years and feel confident about the dividend and the dividend growth.

22:05But the reality is, in a perfect world, you do want to find this pricing where the yields are higher so your dividend yield on cost can grow higher over time. The reality is the safest way to approach dividend growth investing is stocks growing free cash flow at a double-digit rate with, you know, projectable, predictable cash flows even 5 to 10 years from now because you can feel confident the dividend will grow over time. So we're looking to maximize total return still. That's the answer. We're not looking for yield at the price of sacrificing total return. We're looking at the capital allocation of these different businesses, and we're asking ourselves, is this a stock that can maintain and grow its dividend over time?

22:40The yield is really not the first metric we should be looking at if we're a dividend growth investor. And that's my opinion. I'm sure some people claim to be dividend growth investors and they think the yield is the first thing. But to me, if the yield is the first thing you're looking at, you're a dividend investor, you're a high yielded investor. So I would say that's the caveat in my opinion. So hopefully that clarifies maybe a little bit of your question.

22:59Mindy Jensen:So I come at things from a different way than Scott does. But what I'm seeing with the Microsoft stock is that it is priced at almost$500 and it's paying me not even a dollar quarterly. To me, I want to maximize the yield. Otherwise, why am I putting my money in this stock? Well, Mindy, I thought you were a total return investor, though. I am a total return investor. For this scenario, I am pretending to be a dividend investor. UPS pays a 6.6 % annual dividend yield. So$1.64 a quarter on a about$100 stock price. That is a lot more understandable. There's another one that is Altria is 6.3%. I don't invest in Altria because they used to be called Philip Morris.

23:48Mindy Jensen:They make cigarettes and I don't want to support that company. But yeah, they pay a lot of money because people aren't going to stop smoking anytime soon. There's a REIT that focuses. Would you consider a REIT to be a dividend stock? Yes. I mean, most people do. I don't know why I'm coming up on a block there, but V-I-C-I-V-C-V-C-I. Yeah, I talked to the CEO the other day, actually. Yeah, 6.9 % yield. So I didn't actually look up their stock price yet. Roughly$25, I think. Okay, so 7 % yield, according to this,$25 stock paying$0.45 quarterly. That's a lot more understandable because I don't have to, like, I could, what is$500 divided by four?

24:29I don't want to do math live on air. Too scary.

24:32Mindy Jensen:I don't either. But like I could get so many more shares of this and they're with a 45 cent, like$25 stock price, 45 cent dividend versus$500 stock price,$1 dividend. Yeah, well, I think different goals and different strategies. So to quickly answer the three stocks you mentioned, UPS, declining volumes, capital allocation doesn't look good. Altria a little bit better. Their payout ratio from a free cash flow perspective is sitting at roughly 80%, which management has actually stated is their target goal. Now, a lot of people will look at their return on invested capital, which I think was around 37 % last year and say, well, why are they not heavily reinvesting back into the business?

25:12Well, it's because they're reinvesting so little capital, it's easy to generate a high return on invested capital. They're using all their capital to pay out dividends and to buy back shares. So I think the dividend is a little bit stronger for Altria than it is UPS. They have a lot of pricing power, but they're also seeing volume decline similar to UPS. Now, Vici is a unique scenario. Again, like I said, I talked to the CEO the other day. AFFO payout ratio for them, I think, is 75 % right now, which they've stated as their target payout ratio. That's one I think is a little more compelling. The issue with Vici right now, the reason you're seeing a mispricing potentially, is their two largest tenants make up about 70 % of their rent roll, and they're both about to go private.

25:49And so investors are going to loose visibility into rent coverage. So it's pushed the stock price down. The yield has gone higher. But I think Vici is interesting at these prices. They have a lot of tenant concentration, but if we see risk with those top tenants, obviously, that's the primary concern. I hold Vici in my portfolio. I think it's an interesting higher yielder, personally. Again, I think it depends on your goals. There's absolutely those high yield opportunities. So to give you an example, we run a model high yield portfolio over on Dividendology.com. One of the recent additions, we added innovative industrial properties, preferred shares, which at the time, trading at about$23 and yielding 10%.

26:22And it had 16 times dividend coverage. To me, that's an incredible high yield opportunity. I want to move away from these individual stock analyses, because there's a lot of different opinions out there about those. And you do a great job with that on your channel at Dividendology. And go back for a second here. What is the framework? Like, like, forget this company and their rate, like Mindy and I, and I think many of the BiggerPocketsMoney listeners will say, that's not something you can do. You know, maybe maybe you can do it, Eli. Maybe there's a few people who spend a tremendous amount of hours doing it.

26:49But now you're talking about I'm analyzing companies specifically there, whatever. I'm making projections about five to 10 year growth. Now I'm back to fundamental stock evaluation analysis. And that is not the academic case for dividend investing at the fundamental level. There's a framework here, right? There's a, here's the starting yield and here's the other conditions of the company. And in that situation, then you have a credible case, which other people can beat up and defend and go against you for that makes it for growth investing. What is that box of a fictional company that would meet that criteria?

27:23How do I construct an index or a portfolio of these fictionally from scratch before I talk about Altria's management? Well, here's the irony of this. The perfect company would not pay a dividend. And in a world where we have infinite resources, they could reinvest to continue to generate high returns on capital and compound forever. And you would never have to worry about sequence of return risk. You would never have to worry about distributions. But the reality is, you know, Meta's a great case study. Why do they pay out a dividend? And I know you don't want me to talk about individual stocks.

27:52This is a good case study. But the reason they pay out a dividend is because they have finite resources. They're generating so much free cash flow, they can't intelligently reinvest it. What does an actual perfect dividend stock look like? If we're talking specifically about dividend growth, typically you want to see the free cash flow ratio roughly in the 10 to 30 percent range. I would say you want free cash flow growing at double digits. The dividend will grow in line with free cash flow. You want to see a company that has pricing power. Pricing power is an indicator of a moat. You want to see what's going on with the margins.

28:19What's going on with the margins is an indicator of a moat. Because ultimately, we want to buy companies growing free cash flow at a high rate. Why? Because that's what's going to sustain the dividend growth over time. To really answer the question, if you want to make it as easy as possible, if you're scared of the individual stock analysis. You know, the framework that SCHD uses is following the Dow Jones US Dividend 100 Index, which is the index we referenced at the beginning of this video. It's the index that over full market cycles has outperformed the S &P 500. Now, again, I don't want to make it sound more glamorous than it is.

28:47It's not going to outperform, particularly in raging bull markets like we've seen over the last four years. However, the dividend will continue to grow from a total return basis over full market cycles. It's going to do very well. I don't know if that's detailed enough for what you were asking. The framework, it's not yield oriented. We do love for stocks paying those distributions for a total return basis and to eliminate sequence risk. It's also an indicator that management believes free cash flow and the dividend will continue to grow in the future. You know, if you're asking me to peg down what the perfect stock looks like, I don't know if I can do that because I think it depends on a lot of variables and what the ultimate goals of the investor are.

29:21Mindy Jensen:I'm a little hung up on you saying it's not yield oriented. If I am investing in dividend paying stocks specifically to get the dividend, what am I investing for? Well, because you're not buying the dividend today, you're buying the dividend that's going to pay in 10 or 20 years from now. Some cases, depending on your age, 30 years from now. How does that solve sequence of returns risk? Because the amount you receive in income grows every single year. If you're living up the distributions, your income grows every single year, regardless of what the value of your portfolio is doing every single year.

29:49So the academic case for this comes from Michael Fink and David Blanchett. They said, do not target something with a 7 % to 10 % starting growth. Target a starting yield of 2 % to 4%. Don't target a 7 % to 10 % yield or? Target a starting yield of 2 % to 4 % paired with an annual dividend growth target of 7 % to 10%. That was the first criteria. Second criteria is the free cash flow and payout ratio that you just mentioned there. And they want that to be capped 60 % or less. So there's a margin of safety. They want a longevity of dividend streaks over, I think it's like 25 consecutive years or 10 plus years or like two cutoff points there.

30:24And they had diversification across 20 to 60 stocks, capping any single stock position at 5 to 7 percent of the portfolio. That's the case that they made. How close is that to what you do in practice? I think that's fairly close. They hit on a lot of things. I think 60 stocks is a little bit extreme, even for somebody that's doing stock analysis every single day. Yeah, it's 20 to 60 was their sweet spot, basically. I would stay to the lower end of that. Here's what's interesting. You know, a 1 % yield where the dividend growth is 20 % in perpetuity, you know, 30 years from now is going to have a yield on cost substantially higher than a yield right now at 5 % growing the dividend at 5%.

30:59So it's what is your target maximize income date, for lack of better term, if your target date is in 10 years from now, probably what they say is pretty close to what you want to aim for target the yields of two to 4 % that can maintain dividend growth, ideally, at a rate slightly above inflation, maybe five, six, 7%. I would say for somebody with that type of time horizon, that's the type of framework you would want to pursue. I want dividend growth at a rate much higher than that in my perfect world. So everything they stated, I think, is pretty close to what you would want to see if you're looking to retire off dividends, particularly in 10, 15 years.

31:31A free cash out ratio of 60 % was very manageable, but you do have to watch closely what's going on internally with the company. I would prefer it to be lower if you're a longer term investor. But I think that framework is pretty close to what you would want to aim for for a lot of investors who are looking for a mix of yield and growth. In your experience, I guess the question is, how would you argue that this will actually work and continue to grow the dividend? Because obviously, if I have a starting dividend and I grow at 7 % to 10 % a year, it sounds great. But I guess, how do I assess the risk?

31:59I think this isn't a question particularly just about dividend investing. I think this is any type of investing, even outside of equities, right? You could say the exact same thing about real estate. You could say the exact same thing about growth. So I think particularly the advantage that dividend growth investing has is this is the most fundamental and by fundamental, I mean, you know, focus on the company's actual fundamentals type of investing that there actually is. You don't care what the share price is tomorrow in reality. We do because it's fun psychologically, right? But as long as the company is growing the free cash flow over time, you know, they can continue to grow their dividends.

32:32I think the case studies you would want to look at are the dividend growth ETFs. Look at the holdings within DGRO. Look at the holdings within SCHD, which again, Schwab US Dividend 100 Index, the same index that we've been citing the studies from starting in 1998. Look at the holding in Vanguard's high yield funds, which they say high yield. The yields really aren't that high relative to what most people consider high yield. Let's pull one up. Like if we look at DGRO, this is the iShares core dividend growth ETF. Look at the top holdings in this. We have Microsoft is the top holding. We have JP Morgan Chase, Johnson & Johnson, AbbVie.

33:04You have to be careful with pharmaceutical stocks because future cash flows are pretty difficult to predict. So keep that caveat in mind. We have ExxonMobil. We have Apple, Broadcom, Procter & Gamble, Merck, Home Depot. Those are the top holdings. It looks like most of them are weighted at about 2 to 3.5%. Those companies that I think people can feel very comfortable holding for the long term. I mean, you're typically focusing on very established large cap stocks with healthy balance sheets, reasonable payout ratios and a runway for growth in the future. So, I mean, if you're looking to get started with this type of strategy, look at those holdings in the key dividend growth ETFs.

33:37But the short answer is your success isn't guaranteed. It's not guaranteed with any type of investing. So I'm not here to make this sound like some magic strategy where, you know, everything goes right. You undoubtedly have to make the right decisions as with any type of investing.

33:50Mindy Jensen:I am older than Scott is. I am 53. And I am looking to simplify my life after a very complicated investing strategy. And this sounds like it's going to take up a lot of mental space, a lot of research, a lot of like really, I mean, first of all, yes, it is going to because I've never done this before. But who is best suited for dividend investing, dividend growth investing? I would say total return investors with a 20 plus year time horizon. I think the closer you get to what you would call your retirement date, you want to focus more on higher yield investments. This is make note about it. This is a long term total return strategy.

34:31So I think the issue with the term dividend growth is people hear that term, hear the word dividend in it and assume it's more oriented towards people looking to maximize yield. It's really the complete opposite in a lot of cases. Dividend growth doesn't stop becoming important, is what I guess I'm trying to say for somebody closer to retirement. I mean, if you're living off the yield, you still need dividend growth to be in line with inflation. Otherwise, the purchasing power of your yield is being eroded every single year. So if you're looking to simplify and pursue more yield, you know, start with the Schwab U.S.

35:01Dividend Equity ETF. Right now, the Trunk 12-month yield looks like sitting at about 3%. The 10-year dividend CAGR is 10.24%. Throw some REIT exposure in there, you know, some realty income, Agree Realty. these REITs that are yielding 4 % to 5 % to boost your initial yield and are growing dividends at a rate of above inflation. There are some MLPs in there. There's some great energy companies with strong balance sheets who aren't exposed to commodity price exposure, yielding 7%, 8 % like energy transfer, like MPLX. So that's a whole nother discussion, but there's absolutely some phenomenal opportunities in the higher yield space that still grow their dividend over time.

35:40So technically, they qualify as dividend growth stocks because they're growing dividends. But to me, dividend growth investing more than anything is a long-term strategy aimed at maximizing dividend income over the long term. The thing that I continue to come back to across this entire conversation is the use case for this is to reduce sequence of returns risk, as you stated up front. That is one of them. Okay. Is there another reason or other reasons to do it? Well, it's a total return strategy, and it's also historically had lower levels of volatility. So there's, we haven't even touched on this, but there's absolutely a huge level of a psychological component to dividend growth investing.

36:15Hopefully, you know, investors aren't looking at their portfolios every day unless they're a hands-on investor. Because if you look at the fund flows of ETFs during like 2009, they were all pulling money out of their portfolio, which was the exact worst time to do that, right? So there's a psychological component as well. But go ahead, Scott. Those are great reasons. And I think just like the fundamental of I'm only comfortable spending the income for my portfolio is, frankly, underrated a reason to invest in certain things. I think there's lots of people who love the I'm going to sell stocks, I can control my income piece.

36:47And that's great. And there's a real case for it. And there's a lot of people who just won't or can't do that mentally. And I don't like spending down the golden goose in my portfolio. That's one of the reasons I own real estate, which produces yield that I didn't feel very comfortable spending, for example. So it was just my twist on it. If those are the reasons, how mechanically do I facilitate an early retirement? Do I sell? For example, you used S-Shield, right? Which has a 1.96 % dividend yield. Oh, S-C-H-D. Excuse me. S-C-H-D is, I think, what I was referring to. What am I looking at? I'm sorry.

37:20I'm sorry. D-G-R-O. Oh, okay. Yes. That one has a 1.89 % 12-month trailing yield on its dividend. Does that sound about right? Yep. Okay. So that's at 1.9%. How mechanically do I support my spending at the 4 % rule with a portfolio that has this as all or part of the position at that yield? Well, you should theoretically say your living expenses are, and I know it's different depending on where you live. So everybody in the comments will be like, that's way too much or that's way too cheap. But say theoretically your living expenses are, to make the numbers easy on me, so I don't look dumb,$50 ,000 a year.

37:54Obviously, what does that mean? Well, it means if you had a$1 million portfolio, you need a 5 % yield. On top of that, you need dividend growth to at least be in line with inflation for that to be sustainable. The reality is, I think you can spend the majority of your yield as long as your dividend growth rate is above the rate of inflation. Because you can expect that the following year, you have even more purchasing power relative to your portfolio last year. Again, this is why I keep hammering home the importance of dividend growth being above the rate of inflation. Because if in that same scenario I just mentioned, your dividend growth rate is roughly 7%, which would be a good growth rate for a 5 % yield, your purchasing power will increase substantially relative to what inflation did the following year.

38:35Assuming that the inflation numbers were told and reported are accurate, of course, right? I know people like to make a big fuss about that. I think you can feel comfortable spending the majority of your yield. Everybody should have an emergency fund. I'm all for, you know, the simple Dave Ramsey type financial management. You really don't have to be too concerned with withdrawals. I mean, the income is growing and it's growing every single year. And when you have funds like DGRO, SCHD, probably even better from a retiree perspective, the income is going to grow every single year. Let me rephrase my question here, right?

39:05Because it's$50 ,000 in spent. Perfect. Okay. Let's start with that. That means that I need a portfolio of$1.25 million at 2%. I'm rounding up for DGRO here to 2%. It's 1.89 % that I'm rounding up. 2 % will generate$25 ,000 of my$50 ,000 in spent, right? You see where I'm going with this? How do I mechanically come up with the other$25 ,000 required to support my spending? The answer we have in the 4 % rule is here's my stock bond allocation and I'm going to take my yield from my bonds. I'm going to take my dividend yield from my position and I'm going to sell a small fraction of my principal and that's going to fund my lifestyle.

39:42And that's how I'm going to do that. I'm going to do that periodically, monthly, quarterly, or annually, depending on my preference. I'm going to have a cash position. When you say this is going to eliminate sequence of returns risk, if it was above 4%, I don't have an issue. You just spend the yield. But right now it's at 2%. So how do I, or below 2%, so how do I mechanically facilitate that as an early retiree to live on? Well, the issue with this is you shouldn't be buying DGRO if your goal is to retire next year, right? You should have bought DGRO 10 to 20 years ago and let the yield on costs grow over time.

40:12You should be looking for a higher yield. So I see what you're saying now, but the reality is if you are in DGRO at that point, you need to reallocate towards more yield and you're going to get hit with a tax consequence assuming you're in a taxable brokerage. So I hate to say, but I think that's somewhat poor planning. Now, the caveat to that is if you were in DGRO 10 to 20 years from now, your yield on cost probably is well above 4 % and your capital has probably grown substantially. If you're at that point, you still don't have enough capital to manage a 2 % yield. You need to reallocate towards funds where you can get 4 to 5%.

40:44So, for example, I mentioned David Bonson, I think, earlier in the video. You know, TBG is an ETF that his company runs. They target about a 4 % yield with fairly high levels of dividend growth. If you look at the trailing 12-month yield right now, it's about 2.7%, but that's because of the timing of the fund flows, which is getting way too nerdy for the scope of this video. But generally speaking, the yield is about 4 % with dividend growth at a pretty fair rate above inflation. That's the type of fund you should probably be targeting for the most part. So it sounds to me like in the world of dividend growth investing, you just need a bigger portfolio to support your lifestyle.

41:20And the advantage is you're going to blow past your wealth number, the 4 % rule concept, and you're only going to spend the income. The golden goose never gets harvested. In many scenarios, it just continues to grow, allowing you more and more spending power over time. I think there's a very attractive element to that. The reason I keep coming back to this is I know we're going to get beat up in the comments from people who are like, well, that means I need$2 million or$2.5 million portfolio instead of$1.25 million to retire on$50 ,000 in spend. I'm not trying to defend a low yield strategy when it's time to retire.

41:51I'm not going to come in the comments and be like, oh, you need more money. You need more yield. You're absolutely right. So you need to be pursuing the dividend growth strategy 20 years in advance. So your yield on cost is 20 to 30 percent and you have more money than you know what to do with in retirement. You know, once you get to retirement, you need to be boosting your yield. You need to be looking for yield, sustainable yields that can be maintained and grow at a rate above inflation. I'm not trying to defend a low yield strategy when it's time to retire. Perfect. And I think that's been the crux of where I've been asking questions and you've been pushing back across this episode is there's a different worldview inherent in the way you're building this portfolio, which is not.

42:27I'm seeking to retire early at a defensible number. It's I'm going to build a number such that I'm spending a minority of the cash flow produced by my underlying portfolio. And it's always growing relative to inflation on the basis. There's a really strong possibility that will always grow relative to my basis, my investment. I'm only going to spend that minority of the cash flow. And that's a generational wealth and infinite investment approach rather than here's how I get to my retirement number and last for the rest of my life with very high probability of success as soon as possible. Is that fair?

43:00So yeah, here's the one thing I would add to that. You might have alluded to it a little bit. The irony is that with where my portfolio is at right now, I can achieve retirement quicker pursuing a dividend growth strategy versus a high yield strategy right now. If I were to go all in on these 7 % to 8 % yielders that are going to see very little dividend growth over time versus stocks yielding 2%, growing dividends at 10%, With where my portfolio is at right now, I'll achieve financial independence quicker with a dividend growth strategy. So it's very dependent on where you personally are right now.

43:30As I understand your position, if I invest in DGRO to execute the dividend growth strategy, the retirement plan is buy that and spend the dividend. You know, you buy that for 25 years or whatever, but once the dividend is higher than my lifestyle expenses, I'm done. Yeah, that's a pretty good argument. That's pretty good. Yeah. Okay, great. So here's the challenge I see with that for the listener of this show. If you handed me a million dollars in cash today, and I wanted to spend 40 grand, I'd put it in the 4 % rule portfolio and withdraw 4 % a year using what I just talked about, right? And I have a 95 % chance of success across historical periods, you can argue today's valuations, you know, whatever.

44:07But that's how I do it. With your strategy, I'd need$2 million to generate 2 % yield. And that is the crux of my argument there because now, yes, I completely agree you're safer with$2 million spending 2 % of it than$1 million spending 4%. No one's arguing that. But you've just doubled my retirement FI number with this approach as I understand it here under those conditions. I would argue you don't need capital. You need time. If you want your yield on cost to grow, if you're going to utilize a dividend growth strategy, you need time, not capital. The dividend growth strategy is not an immediate yield strategy.

44:41And I've continued to concede this point throughout. If somebody has a million dollars and they're like, hey, I'm really excited. I hit a million. I only need$40 ,000 a year after Social Security. I'm not going to point them to DGRO. They need more yield. And that's the reality. And there are funds that grow dividends that have that 4 % yield, like I mentioned, the TBG. But yeah, you're right. I'm not trying to disagree with you on that one. Okay, so then help me understand, is your argument that, let's say I'm starting today and I'm going to invest$1 ,000 a month and I want to build the most wealth I can over the next 25 years.

45:13That's your argument for dividend growth. And I put that in dividend growth. How does that compare to the index? It depends. Over full market cycles, like we said, dividend growth is historically outperformed over about a 50-year time period. That's what the Hartford Fund study has showed us. The caveat to that is that outperformance, like I said, has come during bear markets. So if we're just in the golden age of AI and we remain in literally the best investing period of all time over the next 20 years, the index is going to do better, right? But if we do get a 09 pullback, if we get a dot-com bubble pullback, if we get an 87 pullback, dividend growth investing is going to become the most popular investing style of all time.

45:49Yeah, no, I think in a bull market environment, you know, dividend growth will probably see slight underperformance in a lot of cases. Okay, so is it fair to say that you're saying if you're starting today and want to build wealth long term that you can retire on, if you start with a dividend growth investment approach and you just buy in continuously like that for the next 25 years and you reinvest the dividends during the accumulation period, you will have roughly double the portfolio of the index under today's starting conditions. It doubles a lot. You know, the annualized return of the study I cited earlier for the Dow Jones was 11.17%, while the S &P 500 was 8.85%.

46:24I think cumulative return of Dow Jones, I have the numbers in front of me, I'm looking at it now, was 1 ,758%, while the S &P 500 was 940%. So I mean, it did outperform by quite a bit. But telling someone they're going to double their performance, I wouldn't feel comfortable saying that. That's quite a bit of outperformance. And predicting 20 to 30 years out into the future is just not, I couldn't make a statement like that. That's just a little, it's a little too aggressive of a prediction. But I do think for full market cycles, that's the key term, full market cycles, you will likely outperform.

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48:29Mindy Jensen:Finding a financial professional who truly understands financial independence isn't easy. That's why Scott and I created the five friendly professionals list. This is a curated network of CXPs and tax professionals who understand the fire mindset, early retirement and wealth building. We're adding more vetted experts all the time. Find someone who speaks your fi language at biggerpocketsmoney.com slash fi pro. That's biggerpocketsmoney.com slash F-I-P-R-O. And do you have any where people can look for answers to what the starting withdrawal rate I can use as a retiree in dividend growth investing?

49:08I don't recommend a withdrawal for the dividend growth strategy. You can absolutely use a combination, but you're going to need to do a little financial modeling to back in how much are you taking of the yield or how much are you withdrawing? Are you reinvesting the dividends and still withdrawing a certain amount? I would really target a yield on cost, get your dividends above your cost of living and make sure your dividend growth rate is above the rate of inflation. I think that that's where this discussion, I think, needs to conclude here on it is it's just a different worldview that you can tell just struggling to wrap my head around.

49:37Because to me, I'm hearing you say that and I'm hearing, well, then I need double the terminal portfolio in order to sustain my cost of living on a 2 % dividend yield. And you're saying that's not how I'm thinking about it at all. Well, Scott, I'm thinking about it as a long-term growth play. And yes, I'm going to get this portfolio to be the dividend yield is above that. I don't care what the price of the underlying assets are. In today's world, yes, it would need to be twice. But that's not how I'm not even really conceiving of the problem that way. I'm just conceiving of it as a cash flow net to me dividend payout that I'm then spending.

50:11And that's how I'm going to fund my life. Is that the right way to think about it? To be honest, I don't know if we're 100 % on the same page, Scott, because I don't think you need double the portfolio. We're focused on growing our yield on cost over time, which some people say is a vanity metric. But ultimately, we're just looking to get our dividends at a point where it's above the cost of living. And your portfolio won't have to be double the size to make that happen. Just as a rough example, we associate the stock price sometimes with performance. In the short term, that's not always the case.

50:34In the long term, it typically is the case, right? But if a stock over a five-year period, their share price goes nowhere, but the dividend doubles, the amount of capital you need to live off dividends where the dividend growth strategy is substantially less than a 4 % rule. So maybe that last example gives a little more clarification. But yeah, Scott, I've really appreciated you having me on the show today. Yeah, absolutely. Okay, one last try here. What we can agree on is the ratio of the dividend payout to my portfolio size is the big difference maker here. Define it. What do you need by ratio?

51:03Like the dividend rate. Like the payout. The yield. Yeah, the yield of your portfolio. If I want to spend$100 ,000 and I got a 2 % dividend yield, I need a$5 million portfolio, right? Yeah. You don't want that to be your yield. I'm not arguing case for low yield in a retirement scenario. I think I'm just still still stuck, Eli, on I think that the argument for dividend growth investing for an early retiree is a fundamentally different framework than the traditional retirement research we've talked about. And it's just about getting your dividends over your cost of living. And in today's environment, that means you have to have a much larger base because the dividend yields on most stocks are so much lower than they usually are because of perhaps inflated valuations or just where the market is right now.

51:44In other market situations, that may not be the case. You may need less wealth because the payout ratio is much higher and you're getting a 7 % or 8 % yield. Is that the right way to understand it? I think we're close. Okay, fair enough. Eli, where can people find out more about you and learn more about Dividendology? Yeah, so you can either subscribe to the YouTube channel, Dividendology, or go to Dividendology.com, sign up for the newsletters. These are strategies we discuss frequently. We dive deeper into high yield and dividend growth opportunities. But Scott and Mindy, thank you so much for having me on the channel.

52:10I really appreciate it. Thank you, Eli.

52:11Mindy Jensen:Eli, I appreciate your time, and I appreciate you explaining this strategy. When somebody has a 20-year timeline, maybe this is something they could look into. I don't know that all of our listeners have the 20-year timeline they're looking to retire early, but some of these stocks that we discussed today, I'm going to take a deeper dive into. Yeah, yeah. Again, I definitely would point them to a higher-yielding strategy, but again, I appreciate you guys taking the time today. Awesome. Thank you, Eli. We'll talk to you soon. All right, Scott, that was Eli Brees from Dividendology talking about dividend growth investing.

52:45Mindy Jensen:I'm curious what you thought. I remain completely unconvinced that this is a good strategy for the financial independence community, frankly. I think that the use cases for dividend growth investing, to me, appear to be, one, in the accumulation phase. and I need to go back and look, but I'd want to see a data set that said, given this set of criteria on entry across this historical time period, this outperforms by this much. I do not want to see a, in 1999, this strategy outperformed by this much in these situations and that kind of stuff for a long-term dividend growth approach. So I think that's one.

53:22Two, the strategy appears to be spend the yield that comes into you. And if today's index wide yields for indexes like SCHD, which I mistakenly called SHIELD because it looks like a shield. So if the dividend yield for SCHD is 3.05%, then I want to spend a hundred grand a year, right? So a hundred thousand divided by 0.0305, right? Means I'm going to need 3.2 million bucks in order to sustain an early retirement. Versus if I go with Bill Bangan's research and use a 4 % withdrawal rate, I'm going to need$2.5 million. So that's the first question I have is there must be another reason to build the dividend growth portfolio, perhaps because I want to balance more of my long-term wealth.

54:11I like the psychology of never spending the golden eggs. I want my portfolio to have a better chance to grow long-term and I'm only comfortable spending the cashflow. Like those are good reasons to me, but it's a fundamentally different approach. It's not the math we've talked about other folks does not seem to support that. And the second part is if the goal is to accumulate, well, then I have the same problem. It means I have to accumulate far past my 4 % rule number in order to retire early. And therefore I would hope to have better accumulation. So that's the problem I'm seeing with the dividend growth investing piece.

54:43That said, it may work out better than, for example, owning real estate paid off the way I'm doing it or other strategies out there. I just, I'm not sure I still grasp the academic argument for why would I'd want to go with dividend growth investing rather than other types of investing like factor tilts for small cap value. If you think valuation and cash generation are a big metric, why is dividend investing in particular? I don't think that's yet well defended in my mind. And so that's why I remain unconvinced, despite some of the great arguments we heard from Eli today.

55:11Mindy Jensen:As I understood him to say, the dividends increase in time. So they're not just paying out 3 % today. For you to do SCHD today, you would need, what did you say,$3.2 million or whatever in order to live off of those. But what I understood Eli to say is in the past, maybe SCHD was only paying 1 % and then it gradually increased to like 1.5 and then 2 and then 2.5 and now it's 3.05. These are obviously numbers that I just made up for illustrative purposes. But I gather that the amount that you will totally invest and have it grow will be smaller than the amount that you would need to invest in your traditional 4 % rule.

55:57Mindy Jensen:But I didn't understand how you could extrapolate that information and predict how big of a portfolio you will need because you can't predict how much they will increase their dividend. So for that reason, I remain unconvinced that this is a good strategy for people pursuing financial independence or people pursuing FIRE. The RE stands for retire early. You don't generally have a 20-year timeline in order to pursue this. If your goals are different, maybe dividend growth would be a great strategy. And then go check out Eli's channel, Dividendology, because he can tell you more about this and talk about the specific stocks.

56:37I think for me to be convinced, here's the conditions that I would need to have proven to me and maybe somebody in the comments will help me out here. But first, I'd want to see that during the accumulation phase, I'm going to get better total returns, net of dividends reinvested using a dividend growth investment strategy. So that's criteria one. And then criteria two is that when it is time to switch to a retiree portfolio, I'm going to get some combination of better returns or spending returns, right? A higher floor, higher ceiling. And I think that where I can say, here's what makes sense to me from dividend growth investing is because I'm withdrawing at a lower rate, I'm only spending the yield.

57:19I'm more likely to have a rising floor of spending across my time period and end with more terminal wealth than if I withdrew at the 4 % rule. But here's my problem with that. This is why I'm continuing to be stuck. if I just used the traditional retiree portfolio and spent 3.03 % of that, would I be better off than the dividend growth approach? And to me, that's the question that still is unanswered here about this is if the answer is dividend growth is going to require you to just spend your yield and it's going to be lower than the 4 % rule, that's fine. But now you're making a different argument at that withdrawal rate.

57:51What is the most optimal portfolio? Is it this dividend portfolio or something else? And so to me, that continues to remain unproven. And for now, I walk away from this conversation today thinking the case for dividend growth investing is for the psychology of being able to spend the golden eggs and never having to harvest the golden goose in selling shares in my retirement portfolio. There's a psychological argument for that that I buy. What do you think, Pindi?

58:17Mindy Jensen:I can see your point. I just remain unconvinced that dividend investing is the way to go for the FI community. Well, fair enough. Let us know if you agree, disagree, invest in dividends. I'm sure that there are winners within the dividend growth framework. I'm sure that there are plenty of companies in there. I'm sure there are great stories of returns. And I'm sure that there are companies that will continue to produce great returns in there. I just don't think I can pick them. Yeah, exactly. I might dabble in some, like we talked about UPS. I know UPS. I understand their business model. There are other companies that I either don't want to invest in their business model or I don't understand it.

58:53Mindy Jensen:I don't mind throwing a couple of dollars at it and seeing, you know, what happens over the course of several years. but I don't think I'll be changing to a dividend growth strategy anytime soon. What should we get out of here, Mindy? All right, Scott. As always, you can find all of our awesome show partners at biggerpocketsmoney.com slash 5Pro. And we are Bigger Pockets Money on YouTube, Facebook, and Instagram. And don't forget, we also have a website, biggerpocketsmoney.com, with a ton of free resources to help you on your journey to 5. All right. That wraps up this episode of the Bigger Pockets Money podcast.

59:28Mindy Jensen:He is Scott Trench. I am Indy Jensen saying gotta scoot, Newt.

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1:00:09Mindy Jensen:Need a flat fee or hourly financial advisor who actually understands FIRE? Scott and I built a list of FIRE-friendly professionals to help you on your FIRE journey, and we're constantly vetting and adding new pros to the list. Find yours at biggerpocketsmoney.com slash FIRE pro. That's biggerpocketsmoney.com slash F-I-P-R-O.