Investing for Income vs. Total Return: Why choose?

Welcome to a new Weekend Reading edition, on an important but seemingly never-ending debate: should you be investing for income or total return?

Maybe in the end, why choose one over the other at all???

First up, recent articles on my site.

I contributed to this recent MoneySense Best ETFs in Canada edition – that includes one global ETF I own for total return since 2020:

And, I shared our planned financial independendence budget. I would be happy to compare notes with you on what you intend to spend and when in your retirement.

Investing for Income vs. Total Return, why choose?

Leading off this Weekend Reading edition, a theme I’ve written about from time to time here: income investing vs. total return.

Both approaches have merit: which was the subject of my enjoyable debate with passionate DIY income investor Henry Mah a few weeks ago. You can watch it here!

Personally, while I’ve always had a passion for owning some dividend-paying stocks in my portfolio and likely always will, I can’t ignore the benefits of total return.

At the core:

Investors often focus on total return and likely should during their asset accumulation years in particular since total return encompasses both income generation, such as dividends, and capital appreciation (changes in the market value of your investments). We should all know by now that growth/price increases remain an essential component of wealth-building: prices moving higher and higher than what you paid for them is good.

Income investing focuses on generating regular cash flow from your investments, rather than solely relying on capital appreciation or downplaying it based on your stock selections. Income funds, income-oriented Exchange Traded Funds (ETFs) or in Henry’s particular case, owning a small basket of concentrated stocks from the TSX that pay dividends has provided income-focused investors like Henry arguably lower-risk for him while growing his income higher over time via higher dividend payments.

In the TD debate here, I argued striking the right balance between income needs and growth in the total return equation is probably best for most: it has historically delivered long-term success and there is no reason to believe why a basket of global stocks won’t continue to do so.

So, I get the income investor debate, I really do, and maybe moreso given I consider myself in semi-retirement now; my part-time work started a few months ago.

Investing for income via dividend stocks often includes these benefits for retirees:

• 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. This tangible income (and arguably stable income) can help cover living expenses.
• Rising income: such established companies can also raise their dividends 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.
• 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 below. 

Academic history lessons along with any Google search on this subject will show various charts and graphs that demonstrate the critical role that dividends – and, in particular, reinvested dividends – play in delivering an attractive total return to investors over time. But this just makes sense, in that reinvested dividends are like not getting any dividend payment paid to you in the first place …

Another important contributor to equity market returns has been dividend growth. Equities are growth assets – which I argued in the TD debate – so companies who tend to grow their revenues, profits and earnings over time, is the reason why they can continue to reward their shareholders with higher dividend payments. Growth is needed, for total return, for your/our juicy dividend payments to continue.

And finally, I recognize as a semi-retiree now looking to “live off dividends and distributions” to a degree that income stability is golden. I referenced this above. Over shorter time periods, equity prices including dividend paying stocks are volatile in market value. This volatility is the price you pay for equity investing: in the search for long-term returns you have to stomach market ups and downs.

Income investors will debate they don’t care about stock market prices, they don’t monitor their portfolio very much (which is not a bad thing) since it comes back to the tangible income many retirees are seeking that matters. But over longer investment periods of five years or more, you also know that short-term swings level-out. The noise is removed from 5% or 10% market swings and what happens is behavioural investor sentiment moderates, producing charts like this below that moves up and to the right over time from a collection of stocks in Canada or the U.S. or from international markets.

Meaning, to quote some famous investor:

“…in the short run, the market is a voting machine but in the long run, it is a weighing machine.” – Ben Graham on stocks. Reference: https://fs.blog/mr-market/

Investing for Income vs. Total Return, why choose?

I believe you don’t have to choose. In fact, I suspect many DIY investors have some sort of mix.

I do. 

For approaching 20 years now as a DIY investor and My Own Advisor:

1. We own a mix of many Canadian stocks and just a few remaining U.S. stocks for income and some growth, along with,
2. Low-cost, diversified ETFs that focus on total return.

That 1-2 punch has delivered wonders for us over the years, and it’s a major reason why we are financially independent today.

To wrap, one of the best financial books I’ve read, The Investor’s Manifesto by William Bernstein, talked about the attributes of a successful investor:

1. They must possess an interest in the process,
2. They need more than a bit of math horsepower, far beyond simple arithmetic,
3. They need a firm grasp of financial history, and
4. They need “the emotional discipline to execute their planned strategy faithfully, come hell, high water, or the apparent end of capitalism as we know it.”

This last point, one that Bernstein stresses is all for naught if investors don’t posses this fourth attribute, is likely the single biggest benefit provided to investors who follow an income focused investment strategy. The benefit of getting paid (which I also enjoy and desire) instead of waiting for my capital gains to be had, helps myself and other dividend investors from making too many behavioural mistakes.

Here is my post from 2013 on that too!

Aligned to Investing for Income vs. Total Return:

John Heinzl was on this theme of late as well:  the powerful dividend benefit noboby takes about (subscription).

“Dividends aren’t perfect. Many dividend-paying companies are mature, slow-growing enterprises. What’s more, the total returns of many dividend stocks have badly lagged other sectors, such as technology, that pay little or no dividends. That’s why I believe dividend investors should diversify with index funds that provide exposure to higher-growth sectors.

But when it comes to reinforcing buy-and-hold behaviour and helping to control one’s emotions, dividend stocks are hard to beat.”

Of Dollars and Data discussed the best retirement withdrawal strategy. Hint: there isn’t one. But what’s important:

“As always, the key is intentional planning: understand your sources of income, your spending needs, and where debt – if any – fits into that picture without jeopardizing your future.”

Ultimately, there is no one-size-fits-all approach to drawdown your portfolio. Every strategy I’ve found has pros and cons. I/we will be following a bucket strategy here coupled with variable spending: spend more money from the portfolio in ‘good years’ and curtail discretionary travel spending (as needed) in ‘bad years’.

Here is an updated post from Dividend Growth Investor: Warren Buffett on living off dividends in retirement.

“The concept of living off dividends in retirement is a very powerful one. It’s also very simple. When the amount of dividend income generated by your portfolio covers your expenses, you can retire. I use the rule of 3% to determine how much money I need to accumulate to cover expenses. This means that I need to have roughly 33 times the amount of money accumulated for each dollar I plan to spend in retirement. In other words, if I spend $30,000/year, I need roughly $1 Million invested at 3%. If I need $100,000/year, I need to accumulate around $3.3 Million in income generating assets.”

Save, Invest, Travel and Prosper. 🙂

Mark Seed is a passionate DIY investor who lives in Ottawa.  He invests in Canadian and U.S. dividend paying stocks and low-cost Exchange Traded Funds on his quest to own a $1 million portfolio for an early retirement. You can follow Mark’s insights and perspectives on investing, and much more, by visiting My Own Advisor. This blog originally appeared on his site on June 7, 2025 and is republished on Findependence Hub with his permission.