In Part 1 of “What’s Wrong With Depending on Dividend Stocks?” we described why dividend investing—or, stocking up on stocks with a reputation for consistently paying out attractive dividends—may not be an ideal strategy for generating a dependable income stream out of your investment portfolio.

Today, we’ll look at why we prefer a total return investment strategy instead of seeking more concentrated dividend stock positions, even for retirees who are drawing income out of their portfolios.

Relative Worth

Admittedly, there are more dubious ventures than concentrating on dividend stocks. Take, for example, piling your life’s savings into speculative schemes such as cryptocurrency, SPACs, or Jim Cramer’s latest “Mad Money” picks. (Here’s John Oliver’s clip on that, for a laugh.

But rather than settling on dividend investing, here are two questions for honing in on a better way to build and spend your lifetime wealth:

  1. Investing: As you invest and accumulate wealth over time, how can you pursue the highest total return over time, given the level of market risk you can tolerate?
  2. Divesting: As you take income out of your portfolio, how can you best maintain its risk-managed structure, while generating the most tax-efficient withdrawals over time?

Where dividend investing falls short on these pivotal counts, total return investing is better structured for directly addressing them, head on.

How Does Total Return Investing Work?

Bottom line, there are essentially three ways any given investment can reward investors:

  1. Interest/Dividends: A security can pay out more or less interest or dividends.
  2. Capital Appreciation: A security can offer higher or lower capital gains or losses (based on how much you pay per share versus how much your shares are worth when you sell them).
  3. Cost Control: As you buy and sell your holdings, you can incur more or fewer taxes and other costs that eat into your returns.

Instead of seeking to isolate and maximize dividends as a single solution, total-return investing seeks to make best use of all three of these potential money-making tools as they apply to you, your investment opportunities, and your personal financial goals.

Total return investing offers more flexibility for pursuing overall expected returns within your risk parameters—regardless of where those expected returns come from.

Also, dividend investing limits you to investing in no more than about 40% of all publicly traded stocks. With total return investing, we can consider the entire universe of available stocks.

As we’ll see next, evidence suggests this is an important differentiator.

Evidence-Based Underpinnings

Total return investing is grounded in decades of academic evidence identifying the stock market’s true sources of expected returns. These include investing in stocks versus bonds to begin with, as well as incorporating return factors such as company size, book value, and profitability.

The research is clear: Whether or not a company pays out dividends is NOT among these identified return factors. We’ve known this since at least the 1960s, when Nobel laureates Merton Miller and Franco Modigliani published their landmark study, “Dividend Policy, Growth, and the Valuation of Shares.” They found, if you omit external factors such as trading costs and taxes, investors should be indifferent to whether companies distribute shareholders’ profits as capital gains or dividends.

In a recent VettaFi Advisor Perspectives piece, Larry Swedroe of Buckingham Wealth Partners revisited this conclusion with his own analysis of four popular dividend-appreciation ETFs. He looked at whether they outperformed their counterparts after accounting for the types of investment factors that drive expected returns. Swedroe concludes:

“Be skeptical of strategies that conflict with economic theory. Even without considering the negative tax implications of a dividend-paying stock … investors are better served by directly targeting factor exposures in their portfolio rather than using a dividend screen, which reduces the investable universe significantly.”

The Benefits of Total Return Investing

As total return investors, we can still draw from and make best use of available dividends and interest. Because, on a purely rational level, a dollar is a dollar and a return is a return, no matter how it’s paid out.

But whenever it may make more sense to do so, we can also sell positions to generate income. We can also prioritize managing an investment portfolio and income withdrawals as cost- and tax-efficiently as possible, without having to maintain a dividend-stock exposure.

By building from this position of strength, you can pursue the outcomes that make the most sense for you. Total return investing gives you far more ways to mix and match the pieces of your portfolio accordingly. In fact, most total return portfolios still include dividend stocks; they’re just no longer a central pursuit.

  Total Return Approach Dividend Investing
Portfolio Management We seek to optimize your exposure to the capital available from global stock and bond markets by building a personalized portfolio, invested across risk-managed, global sources of expected returns. Income is then withdrawn out of your total returns, with an emphasis on maximizing efficiency and minimizing costs. Dividend investors seek to draw their income from a concentrated position in stocks (or stock funds) with a past history for distributing dividends.
Concentration Risk To curtail unnecessary risks related to overly concentrated stock positions, we seek to invest in funds that offer broad diversification within and across the types of investments you’re holding. Loading up on stocks that happen to have been paying dividends erodes rather than augments your ability to diversify away excess concentration risk.
Tax Management We emphasize tax efficiency as you invest and spend your wealth. For example, we’ll locate your diverse investments across taxable and tax-sheltered accounts as appropriate, and withdraw income wherever and however is expected to be most tax-efficient over your lifetime. Dividend investing limits rather than enhances your ability to control when and how your income stream will be taxed over your lifetime, as well as where your most tax-efficient income holdings can be managed.


By concentrating on dividend stocks, investors are inadvertently investing in a byproduct of the market’s actual sources for expected returns. Why not invest directly in these sources themselves? By focusing on your portfolio’s total return as the horse that drives your proverbial cart, we believe we can best manage expected returns, and best position your portfolio to generate efficient cash flow when the time comes.

If you’d like to know more, please be in touch.


Investment advisory services offered through Sax Wealth Advisors, LLC (“Sax”), an SEC-Registered Investment Adviser. SEC registration does not imply a certain level of skill or training.

This information is solely for informational purposes and is not intended as an offer to purchase shares/interests in any security. Certain information contained herein represents Sax’s opinion and is based upon information which may have been derived from multiple sources, which may not be verified. The information has been provided in good faith but is not guaranteed and subject to uncertainties beyond Sax’s control. Sax makes no warranty and accepts no liability for the completeness or accuracy of information, the basis of any comparison or any assumptions underlying any opinion.

This information may contain concepts that have tax, accounting and legal implications. This material is for informational purposes only. It is not intended to provide tax, accounting or legal advice or to serve as the basis for any financial decisions. Individuals are advised to consult with their own accountant and/or attorney regarding all tax, accounting and legal matters.

Links to other websites as a convenience to our customers and are for informational purposes only. When you follow a link to one of these sites Sax does not warrant the accuracy, reliability or timeliness of any information published by these external sites, nor endorses any content, viewpoints, products, or services linked from these systems, and cannot be held liable for any losses caused by reliance on the accuracy, reliability or timeliness of their information.  Sax has no control over any such other websites, the contents therein or the products/services offered.

Portions of such information may be incorrect or not current. Any person or entity that relies on any information obtained from these systems does so at her or his own risk.

Prior to making any investment, an investor must receive and read all offering materials and other documents associated with any security. While reasonable care has been taken to ensure that the information herein is factually correct, Sax makes no representation or guarantee as to its accuracy or completeness. The information herein is subject to change without notice. Investing involves risk and you may incur a loss regardless of any strategy selected.

Additional information regarding the specific investment advisory services and products offered by Sax can be found on Sax’s website at

© 2023, Sax Wealth Advisors, LLC. All rights reserved.