Investing for Income Works

Investing for Income Works

A few weeks ago, I had the pleasure of debating an income focused approach vs. total return. I want to thank fans of my site TD Direct Investing for the opportunity once again to discuss this subject along with my investing friend Henry Mah for engaging in the debate. It was a fun and informative discussion for many I believe.

In recent weeks, given Henry won the debate (albeit by a slight margin) I’ve been thinking: why does investing for income work?

I’ll share those thoughts including what speaks to me as part of that approach in today’s post and I’ll also share some of the Q&A from that webinar debate – including what we didn’t have time to cover!

I look forward to your comments of course!

Let’s go. 🙂

Why Does Investing for Income Work?

For many reasons…

I shared both approaches have merit which was the subject of our debate. You can still watch it here!

Personally, I’ve always had a small passion for income investing. I invest that way for part of my portfolio for some key reasons:

• 1. Tangible income: shares of companies that distribute a portion of their profits to shareholders, are often mature and established businesses that have ample cashflow to sustain their payment obligations. It’s hard to ignore the benefts that come from getting paid every month or quarter or year – just like a paycheck. I like getting paid. 
• 2. Rising income: such established companies can also raise their dividend year-over-year, rewarding shareholders with rising income that can help offset inflationary pressures. Sustained 3-4% or more dividend increases by some companies can be inflation-fighters without doing anything / selling anything. I like rising income. 
• 3. Tax benefits: depending on what stocks you own where (i.e., in what accounts), dividend payments can offer favourable tax benefits. Read about the tax treatment of Canadian dividends right here.

Those are my top-3. 

Another reason, and argubly the most important reason for many DIY investors: self-control.

From a recent Globe article I read:

“With dividends, many investors mentally segregate their wealth into two different accounts – one for their capital (stocks) and the other for their income (dividends). This leads them to treat their dividend cash flow as suitable for spending, while leaving their capital untouched so it continues to grow. This form of mental accounting enforces a discipline that prevents investors from running down their savings.

This is not a new idea. In their influential 1984 paper, Explaining Investor Preference for Cash Dividends, Hersh Shefrin and Meir Statman observed that “money is not treated as a homogeneous item. It can be treated in a variety of ways depending on its source, or the use to which it will be put.”

“Consequently, an individual who wishes to safeguard long-run wealth against a compulsion for immediate gratification might employ a rule that prohibits spending from capital. Such an individual may be better off by allowing current consumption to be determined by the dividend payout from his stock portfolio.”

Not everyone has the luxury of leaving their capital untouched. But for those who don’t need to sell assets, the mental segregation of capital and dividends provides a method of self-control that allows investors to satisfy their spending needs without the emotional discomfort associated with selling shares.

Dividends aren’t perfect. But when it comes to reinforcing buy-and-hold behaviour and helping to control one’s emotions, dividend stocks are hard to beat.”

Indeed.

So, dividends are not magical and never have been. They are part of total return. 

Owning some dividend stocks may beat the index, others might lag the index. 

Dividends are not free. Dividends don’t fall from the sky. 

You can of course make your own dividends by selling shares. Yada, yada.

Now, some things I didn’t share in the webinar but could have.

Investing for Income Works For These Primary Reasons:

• Retirees need cashflow to live from – rightly so. While a focus on total return encompasses both dividends and capital appreciation (changes in the market value of your investments) at the end of the day dividends deliver cashflow and cashflow in retirement is king. Rising cashflow is even better of course. 
• Retirees tend to be defensive – understandably so. Dividends and capital gains are like two sides of an investing coin – you can have lots of dividends, sure, but likely little growth on the other side. Dividends are forced stock sales by the company/Board of Directors of your behalf. This would be no different than if the company never paid a dividend in the first place, and you decided to sell the shares yourself. But because the business makes the decision for you, you don’t have to do anything but collect the money to spend, or collect the money to build up cash, or reinvest the money as you please. It’s a defensive and a more conservative way to invest in some ways to help meet income goals. 

Finally, some things that didn’t get covered in the webinar due to time – some webinar questions directed to me:

Q: Mark and Henry are making very good points about ‘their’ own strategy. However, for an average investor (retiree) could the solution be a combination of both?

100%. 

This is why I have a hybrid approach to investing and likely always will. 

This is How We Invest.

How We Invest

Q: If you are a dividend growth investor and you expect an economic downturn, should you sell some of your stocks or just stay the course?

In early retirement, I intend to stay the course as much as I can. That means it is my hope I won’t need to sell any dividend growth stocks in any economic downturn but you never really know.

This question is why I intend to have a cash wedge entering full retirement, as soon as early 2026. 

The Cash Wedge – Managing market volatility

Q: Isn’t it really a matter of timing? If you’re in or near retirement, focus on income growth investing. If you’re 5+ years away from retirement, focus on total growth.

Yes and no.

I really think it depends on your cashflow needs and temperment as an investor. See my points above. You don’t have to switch strategies as you age but I see your point and some DIY investors might do that. 

Q: Isn’t the counterpoint that a dividend is like a forced sale of shares be nullified by the fact that you can simply reinvest those dividends?

Correct. See above. Great point. 

Q: Dividend paying stocks can also go down in value, despite paying a dividend. It sounds like Henry’s stocks don’t rely on the market. That is not the case.

100% agree. 

Whatever investing path you choose, just 10-12 concentrated TSX stocks like Henry Nah owns, a hybrid investing approach like I follow that includes 25+ stocks and low-cost ETFs, or a pure indexing approach that focuses on just global ETFs….as long as you are reaching your investing objectives that’s all that matters in my book. 

Realizing your goals is better than some obsession with benchmarking or beating some index. 

With thanks and attribution to Behavior Gap, Carl Richards sketch guy. 

I look forward to seeing how my investing journey unfolds. My mix of income and growth has gotten me this far and hopefully it will get me even further. 

May 2025 Dividend Income Update

Aligned to Investing for Income Works

Really enjoyed my friend’s post: Most Great Investors are Frugal.

Jeremy is 71, with $2.4 million invested. Amazing results, even if I wouldn’t follow this approach. His approach? A small, very concentrated dividend portfolio (subscription – Globe and Mail).

“Jeremy’s portfolio consists almost entirely of four Canadian bank stocks. “He went all in when the market sold off heavily in March of 2020 at the start of the COVID-19 pandemic,” Mr. Calvert says. “This was an excellent entry point for many stocks, including the blue-chip Canadian financials.””

Last but not least, a very Happy Retirement to a friend of the site, Rob Carrick @rcarrick at The Globe and Mail. I’ve been fortunate to meet Rob a few times over the years. From my early blogging years, I remember some outreaches from him asking for contributions to his articles – those were “WOW, really?” moments for me. As I matured as an investor, along with the advent and growth of his Carrick on Money articles over the last 9-10 years, he was kind to link to my content quite often – seeing value in my DIY investing site and my communications to readers.

Rob, I have appreciated our banter, the discussions, the odd run-in at local Ottawa beer festivals, and the social media engagement. I have no doubt your articles have helped many, many Canadians on many personal finance and investing matters immeasurably over the years and I hope you enjoy your well-earned retirement with your family for many years to come.

Have a great weekend folks. 

Mark