Like many dividend investors, when we started our dividend growth investing journey, we were obsessed with one particular number – how much dividend income we received each month. While watching dividend income coming in every single month without us having to lift a finger was fantastic. But focusing solely on the amount of dividend income we received led us to make the mistake of buying some high-yield dividend stocks that had yields that were simply not sustainable.
This particular mistake, I believe, is a lesson that all dividend growth investors learn at some point in their investment journey.
Over time, I realized there’s several things more important than just dividend income. Becoming financially independent via dividend investing shouldn’t mean only tracking dividends your dividend portfolio generates. It should be something more than that.
How do you track your dividend portfolio beyond income?
Let’s take a look at the holistic approach that I believe dividend investors should use to give you a clearer picture of your FI progress.
Focusing on dividend income only can be very misleading
We have been tracking our monthly dividend income since we became serious about dividend growth investing in 2011. I have been posting regular monthly dividend income updates since the birth of this blog. Yes, tracking dividend income is very simple and motivating, especially when you see it growing month after month, year after year.
But just because your dividend income is growing, it doesn’t mean your portfolio is performing well.
For example, what if Stock A you own increases its dividend payout every year by 20% but the share price has been flat? Or what if you own one of those high-yield ETFs that utilize a margin and covered call strategy to produce an extremely high yield but the share price has been flat or decreasing over time?
In this case, your dividend income might be increasing year over year but your portfolio value may be either flat or decreasing.
Does that do you any good? I don’t think so.
On the other hand, consider Stock B, which has a dividend yield of 1%, increases dividend payout 5% each year consistently, and has seen its share price increase by 10% every year. In this case, your dividend income may only increase by a little bit but the overall portfolio value is increasing at a significant rate.
Pay attention to total return rather than dividend income. Don’t lose sight of the fact that Company B is creating far more total wealth for you, despite the lower dividend yield.
Track portfolio value – Seeing the big picture
Although tracking your dividend income regularly is very important, the total return of your investment portfolio provides a far more important measure.
When you track your portfolio’s total return, it is important to take out new contributions to give you a true reflection of the total return. If you don’t take out the new contributions, your portfolio’s return will be inflated in a misleading way.
Now there are fancy formulae to calculate total return but to keep things simple, this is the formula I use:
(N-D-S) / S
Where N = value now, D = contribution this year, and S = Portfolio value at the beginning of the period.
To get the annual return, I’d check our portfolio value on January 1st and compare it to the portfolio value on the same date in the previous year.
So if your portfolio went from $250k to $375k and you contributed $25k throughout the year, it would result in a 40% total return (i.e. (375k-25k-250k) / 250k). An impressive return, even when you include dividends as part of the calculation.
Yield on Cost vs. Current Yield – Which one is more important?
When we started our dividend growth investor journey, I was fascinated by yield on cost (YOC). I thought it was a very important parameter to track and it would show the power of dividend growth over time.
How do you calculate yield on cost? Well, if you bought a stock at $100 and it pays $4 per share annually, your YOC is 4% (4 divided by 100). When the company increases its dividend payout by $0.40 or 10%, it would mean your YOC is now 4.4% (4.4 divided by 100).
But yield on cost only gives you a backward-looking picture and completely ignores the current market conditions. What can be dangerous is that YOC can mask the declining dividend sustainability.
A better metric to track is current yield, which can be used to track an investment’s income potential relative to its current market price. So if the market price is $100 and the stock pays $4 per share annually, you’d get a current yield of 4%. If the stock price goes up to $200 while still paying $4 per share annually, the current yield would drop to 2%. Current yield provides a better understanding of how the new capital you add today should be valued.
Now, I’m not saying to completely ignore yield on cost. We still track YOC in our portfolio tracking spreadsheet. We just don’t pay special attention to it anymore. What I have found useful is to compare YOC and current yield for your top 10 to 15 holdings every year to see where you might need to rebalance or reinvest.
Total Return: The missing piece in dividend investing
As we learn more and more about investing, I believe one simply can’t just look at dividend income. It’s a misconception that dividend income is free money. Dividends aren’t free money; they’re simply a part of the return you get for owning a stock. Rather than focusing on dividend income entirely, we must look at total return.
Total return = dividends + share price appreciation.
By looking and tracking total return, that’s where you get long term wealth creation.
Let me reiterate the example I used earlier in a table form to emphasize why total return is so important.
| Stock | Dividend Yield | Annual Share Price Growth | Total Return |
| A | 5% | 0% | 5% |
| B | 1% | 10% | 11% |
If you only look at dividend income, Company A looks far better. But in reality, Stock B is hands down a far better stock to own because it delivers a much better total return.
Better total return = reaching financial independence earlier.
So remember, total return matters!
High yield low dividend growth vs low yield high dividend growth
Do you invest in high yield, low dividend growth stocks? Or do you invest in low yield, high dividend growth stocks?
Some investors may focus on high yield, low dividend growth stocks because they need immediate income, while some may focus on high dividend growth stocks because they have a longer investment/retirement horizon.
Should you only focus on one or the other? Or do you have a mix of both? If a mix of both, what’s the percentage breakdown?
Well, I believe that to have a balanced dividend portfolio, you can’t lean on either extreme – you need a mix of both.
What is the right mix is a very personal question. It will be highly dependent on factors like your investment horizon, how quickly you need to live off your investment portfolio, if you’re withdrawing from your principal, if you’re working part time during retirement, etc.
As a result, I can’t tell you what the right mix is but consider the following, A well-rounded portfolio should include the following:
- High-yield low dividend growth stocks for stable cash flow today
- Low yield high dividend growth stocks for future income growth
You may also want to consider a small percentage of stocks in this category:
- Value or total return stocks for long term capital appreciation (i.e. stocks or ETFs that may not pay dividends at all)
A potential trap with dividend growth investment is that you completely ignore stocks that do not pay dividends at all, which typically can be higher growth but potentially more volatilite (think Tesla or Amazon).
Building a holistic dividend portfolio
As a dividend growth investor, it is important to track beyond just dividend income. Here is a simple framework of parameters I believe one should track:
| Parameters | What it measures | Why it matters |
| Dividend Income | Total cash flow from your portfolio | Tracking passive income progress |
| Portfolio value | Market value of all the holdings | You want your portfolio value to increase over time |
| Current yield & Yield on Cost | Income vs. original cost | Whether to rebalance or reinvest |
| Total return | Dividend + price appreciation | Higher total return = more wealth |
The key message here is that dividend investors should move away from simply tracking dividend income. Tracking these additional parameters will give you a holistic and comprehensive view of your portfolio’s health. Tracking these parameters will also help you focus on what matters the most – wealth building and a steady progress toward financial independence.
Summary: How to track your dividend portfolio beyond income: A holistic approach for dividend investors
Tracking dividend income over time is important, especially if you plan to live off dividends one day. But I believe we need to track beyond dividend income. It is important to track portfolio value, current yield, and total portfolio return to give you a more accurate picture of your overall progress.
The goal shouldn’t be to just collect dividends and have your portfolio value remain stagnant over time. The ultimate goal should be building a portfolio that generates both dividends and total return so you can continue to build wealth, become financially independent, retire early if you wish to, achieve your financial goals, and live life on your own terms.
Great article!! Also loved the new podcast, I assume you guys made it before GSY dropped like a brick.
Thank you! Yes, we record the podcast episodes many weeks ahead.
Hi Bob,
We rather use a formula similar to Henry Mah’s “Yield on investment” to measure our progress. So yield is:
Dividend for the year / (Initial investment + all reinvested dividends).
Yield on cost is still a significant metric, in particular for stocks acquired a long time ago with no new purchase.
For dividend stock selection, we use a “relaxed” version of the Chowder rule:
yield 10%
yield between 2% and 4% requires annual growth > 8%
yield > 4% requires annual growth > 5%
Looks like your comment module doesn’t like the “less than” symbol. My first line for the dividend stock selection should read as:
yield **less than ** 2% requires annual growth > 10%
Relaxed chowder rule is a good one, thanks for pointing that out.
When you talk about total return are you referrring to the Chowder score of a stock?
No. Total return = share price appreciation + dividends. So it’s a little bit different than chowder score.
Great article, Bob. I’ve been refining my own tracking system lately, and shifting the focus from just monthly income to things like dividend growth, payout ratio trends, and sector balance has made a huge difference. It’s amazing how much clarity you get when you zoom out from the raw dollar amounts. Thanks for laying it out so clearly.
You’re welcome.