For decades, income-focused investors and retirees have treated ordinary dividends as the holy grail of financial security. The narrative seems simple and comforting: buy shares in established blue-chip companies that pay reliable dividends, collect the quarterly payouts, and live off the yield without ever touching the capital. However, Ed Rempel CFP, Toronto, argues that relying strictly on traditional dividend-paying stocks is an old and heavily flawed income strategy for modern investors. Instead, a comprehensive analysis of portfolio mechanics reveals that self-made dividends (generating predictable cash flow by selling small portions of a broadly diversified, total-return growth portfolio) are superior to ordinary dividends in every measurable way.
To evaluate both investment methods, financial analysts point to how share prices behave on distribution dates. When a corporation issues a cash dividend, the company’s stock price decreases by the exact amount of the payout on the ex-dividend date. In practical terms, an ordinary dividend functions as an automatic, mandatory withdrawal of capital, determined by corporate executives rather than the individual investor.
“Dividends are not ‘free money,” says Rempel. “When a company pays a dividend, the stock price drops by the exact amount of the dividend on the ex-dividend date. Dividends are just a forced cash withdrawal.”
Conversely, self-made dividends operate by holding a portfolio optimized for global market expansion and selling off precise dollar amounts on a monthly or quarterly basis using a Systematic Withdrawal Plan (SWP). This shifts the primary investment goal from immediate yield generation to total portfolio return, providing investors with complete authority over the timing and size of their distributions.
A primary drawback of traditional dividend strategies involves taxation. When corporations distribute dividends, investors incur taxable income in that calendar year, regardless of whether they require the liquidity. For high-earning individuals or retirees, eligible and non-eligible dividends can inflate taxable income due to Canadian gross-up formulas, potentially triggering higher marginal tax rates and benefit clawbacks, such as the Old Age Security (OAS) or Guaranteed Income Supplement (GIS).
By contrast, self-made dividends help investors control their taxable event. Because liquidating a portion of an investment yields a return of original capital with capital growth, only the capital gain portion is subject to taxation. In Canada, where capital gains receive favourable tax treatment compared to ordinary income or grossed up dividends, this structure minimizes overall tax liability.
“In your retirement plan, it is actually cash flow that you need, not income,” says Rempel. “Income is taxable. Cash flow is sometimes taxable and sometimes not. Self-made dividends give you the cash flow you want in your retirement, while having only a small portion of it be considered taxable income.”
For instance, if an investor holds a portfolio that has doubled in value from $500,000 to $1,000,000 and requires $40,000 in annual retirement income, selling $40,000 worth of shares results in $20,000 of returned capital (tax-free) and $20,000 of capital gains. Under standard tax rules where 50% of capital gains are taxable, only $10,000 enters the investor’s taxable income calculation for the year.
Beyond tax considerations, financial advisors highlight severe sector concentration as a major risk associated with dividend-focused portfolios. In Canada, high-dividend mutual funds and exchange-traded funds (ETFs) remain heavily weighted in Canadian stocks, as well as cyclical, lower-growth industries like telecommunications, utilities, energy, and financial institutions. Consequently, investors who filter strictly for dividend yield routinely exclude major international growth sectors, particularly global technology, healthcare, and broad-market innovations.
Focusing strictly on yield can also lead investors into “dividend traps”, holding mature or financially strained companies that maintain high dividend yields to attract capital despite stagnant earnings. Should market conditions deteriorate, corporations can reduce or eliminate payouts, disrupting an investor’s income stream.
Rempel notes that a total-return approach avoids these constraints by enabling broad geographic and sector exposure without requiring individual companies to pay dividends.
“Smart investors never pay extra for dividends on their investments,” Rempel emphasizes, citing legendary investor Warren Buffet’s view that investors should remain agnostic about dividends. “Invest based on fundamentals like risk, return, and growth potential, and invest for the highest, reliable long-term total return after tax.”
This is the key point. The long-term success of your investing and retirement plan is based on the highest, reliable long-term total return after tax. Whether or not there is a dividend payout is a minor technical heavier tax factor.
From an operational standpoint, financial planners emphasize that self-made dividends offer a level of flexibility that corporate dividends cannot match. Retirees can set exact monthly distributions to match their budget, increase withdrawals for major expenses, or pause cash flows entirely during years when secondary income streams are sufficient.
By prioritizing total return over dividend yield, investors retain full ownership over their financial plan, insulating their cash flow from corporate board decisions while maximizing long-term portfolio growth.
