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I'm a complete amateur when it comes to investing but lately I have been thinking of investing my money so I did a little digging. I've found out about dividends and I want to achieve some long term earnings from it. I came across an article from NASDAQ and I saw this table but have no idea how it works:

I saw this graph

Assuming the investor retires at 65 years old, has a 100% allocation to equity securities (I don't know what this means), and the stocks he owns provide a 2% annual yield, wouldn't his portfolio size on the second year be $18,180?

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9% of $9k is $810 so the total after two $9k contributions and one year of growth is $18,810 not $18,180.

The article also has a math error in that it cites 25 years of growth but the chart only goes out 24 years.

The S&P 500 has returned ~9% annualized on a long-term basis.

The article implies that you earn 9% annualized, long term, as well as 2% from dividends. Dividends are counted as part of total return, not because they provide total return but because it's far more complex to explain adjusted close for historical performance.

Their final portfolio value of approximately $722 thousand will generate passive income of $14.4 thousand annually from a very reasonable 2% portfolio dividend yield.

This is one of a long line of web articles that implies that dividends are income. They provide zero total return. Reinvested dividends enable compounding but they are not the cause of compound gains. Only share price appreciation provides portfolio growth.

At age 65, the investor will have a common stock portfolio of nearly $850 thousand, which generates income of approximately $16,800 completely passively with a portfolio dividend yield of 2% (very attainable). The investor can withdraw more if they are willing to reduce the capital base of their portfolio.

Again, the error: Receiving $16,800 of passive income from dividends means that the value of your equity positions decreases by $16,800, assuming no change in share price. Your portfolio value remains the same. If you withdraw that $16,800 then your capital base is reduced by that amount. Withdrawing more than $16,800 decreases your capital base even more.

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  • You are 100% right, but it feels like a losing battle. I’m told that finance is some mix of numbers and feelings, and that I shouldn’t ignore feelings. In this case, while totally untrue, the 2% feels like income. Even though we both know that 10% is still 10%, even if it’s composed of 8% growth 2% dividends, vs 10% only growth. (And funds use the term “growth and income”, playing up the so-called value of the dividend as though it were a bonus)
    – JTP - Apologise to Monica ♦
    Dec 25, 2020 at 15:58
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    JTP - You are right, it's a losing battle. The financial industry has foisted this "dividends are income" notion on the general public. Maybe it's because the technical explanation is too complicated and it's just easier to incorrectly say that the long term return from the S&P500 has been 8% and X pct came from dividends. It amazes me how many people have no clue about ex-dividend share price reduction and will argue until the cows come home that what is actually happening in their own brokerage account isn't possible (ugh) :->)
    – Bob Baerker
    Dec 25, 2020 at 16:08
  • Thanks for the answer, I now have a slight idea how it works. Is 9% annual appreciation in stock?(in this case the S&P 500) really plausible though?
    – Ryuu
    Dec 26, 2020 at 2:47
  • I could give you a precise forecast if my crystal balls weren't broken so alas, I don't know if 9% is plausible.
    – Bob Baerker
    Dec 26, 2020 at 3:30
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Assuming the investor retires at 65yo, has 100% allocation to equity securities(I don't know what this means),

It means that 100% of his portfolio is in stocks. Instead of asking, you would do good to look up word definitions first in a dictionary / wikipedia / investopedia - not knowing the definition of a word is a SERIOUS problem in understanding something.

and the stocks he has grants a 2% annual yield, wouldn't his portfolio size on the year be $18,180?second

There is ZERO correlation between portfolio size and dividend. If I own a million on stocks, a 2% dividend yield would be 20.000 USD. Period. It does not mean my portfolio then is a million and 20k - because the stocks can go up and down. Also dividend yield can vary over the years - just because as tock goes up does not mean the company pays more dividend, and dividend is NOT defined as percentage but as absolute number (i.e. 10 cents per share) because the value of a stock has no direct correlation to the finances of the company.

Without having an second graphs showing how the NASDAQ performed you can not go from "contribution" to "portfolio size". It is quite possibly that the change in portfolio size is quite attributed to change in price of the securities. Also - depending on stock type, a 2% dividend yield is either fantastic high or stupidly low. A lot of tech and growth stocks (and that make up a lot of of NASDAQ) pay NO DIVIDEND. Companies paying dividend are mostly large old established companies that have no better use for their funds.

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Assuming the investor retires at 65 years old, has a 100% allocation to equity securities (I don't know what this means), and the stocks he owns provide a 2% annual yield, wouldn't his portfolio size on the second year be $18,180?

During the years they are investing and working, the author assumes the value of the investments is growing at 9% It is stated in the assumption earlier in the article.

  • The S&P 500 has returned ~9% annualized on a long-term basis.

For simplicity's sake, I will be assuming investors have a 100% allocation to equity securities. I will also be assuming each investor's net income is $60,000. Further, the assumed retirement age will be 65.

That 100% allocation to equity securities is stocks. The author mentions specifically the S&P 500, which is a major stock index. There are many mutual funds and ETFs that follow that index.

The 2% rate is what they assume will happen after they retire. They assume the investments will produce 2% from dividends, and that the investor will never sell any of their investments, but they will take the dividends as cash to live on.

During their working years the stocks are also paying dividends, but they are reinvesting them to buy more shares. That is part of the 9%.

The article is trying to show that you should invest early and often.

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