A dividend is the share of profit a company pays out to its shareholders. Own a share and you receive part of that payment, typically one to four times a year.
For €1,000 a month of dividend income at a 3% yield you need roughly €400,000. That's the figure most articles on the subject omit, and it determines whether dividends can be an income source for you or mainly a pleasant extra.
What a dividend actually is
A company making a profit has two options: keep the money in the business, or pay it to the owners. The second is a dividend.
Two terms you need:
Dividend yield is the dividend per share divided by the price. If a €50 share pays €1.50 a year, the yield is 3%.
Payment frequency varies by company. Dutch companies often pay twice a year, American ones usually quarterly, and some funds monthly.
Important to grasp: dividends don't come from nowhere. What a company pays out is no longer in the business and therefore no longer in the price. On the day the dividend detaches, the price falls by roughly that amount.
What you need for dividend income
| Per month | Per year | At 2% | At 3% | At 4% | At 5% |
|---|---|---|---|---|---|
| €250 | €3,000 | €150,000 | €100,000 | €75,000 | €60,000 |
| €500 | €6,000 | €300,000 | €200,000 | €150,000 | €120,000 |
| €1,000 | €12,000 | €600,000 | €400,000 | €300,000 | €240,000 |
| €2,000 | €24,000 | €1,200,000 | €800,000 | €600,000 | €480,000 |
A globally diversified ETF typically sits around a 2% yield. Specific dividend funds reach 3 to 4%, and high-dividend funds sometimes more.
That looks like an argument for the last category. It isn't, and the reason follows.
A high yield isn't a higher return
What a company pays out it can't reinvest. Companies paying out heavily therefore usually grow more slowly.
| Type | Dividend | Price growth | Total |
|---|---|---|---|
| Global ETF, accumulating | 0% | 7% | 7% |
| Global ETF, distributing | 2% | 5% | 7% |
| Dividend fund | 4% | 3% | 7% |
| High-dividend fund | 7% | 0% | 7% |
At equal total returns the split makes no difference to your wealth. What it does change is whether the money sits in your account or in your position.
One warning that matters practically: a strikingly high yield can mean the price fell rather than the payment rose. And some funds pay out more than they earn, so you're getting your own capital back and mistaking it for income.
Yield on cost: the figure that does rise
Here sits the argument for dividend investing that genuinely says something, and it's rarely explained well.
Your dividend yield is calculated on the current price. But what concerns you is the dividend divided by what you paid, and that figure is called yield on cost.
Say you invest €100,000 at a 3% yield, so €3,000 a year, and the dividend grows 5% annually:
| After | Dividend per year | Yield on cost | Market value | Current yield |
|---|---|---|---|---|
| 0 years | €3,000 | 3.0% | €100,000 | 3.0% |
| 5 years | €3,829 | 3.8% | €140,255 | 2.7% |
| 10 years | €4,887 | 4.9% | €196,715 | 2.5% |
| 15 years | €6,237 | 6.2% | €275,903 | 2.3% |
| 20 years | €7,960 | 8.0% | €386,968 | 2.1% |
| 25 years | €10,159 | 10.2% | €542,743 | 1.9% |
After twenty-five years you receive €10,159 a year on a hundred-thousand contribution. That's a yield on cost above ten percent, while the current yield has fallen to 1.9%.
That isn't an accounting trick. It's why long-term dividend investors see their income grow while the percentage on their screen falls. For anyone building an income stream, yield on cost is the relevant figure, and current yield is the figure for anyone buying today.
What withholding tax does
Tax is deducted from distributed dividends before they reach you.
| Source | Withholding | Creditability |
|---|---|---|
| Dutch share | 15% | Creditable in your return |
| US share with tax form | 15% | Partly creditable |
| US share without form | 30% | Partly creditable |
On €3,000 of gross dividends, the difference between 15% and 30% is €450 a year. For a US position, completing the form at your broker is among the best-paid ten minutes of your investing life.
With an accumulating fund, reinvestment happens inside the fund, so no distribution reaches you and no withholding occurs at that moment. That makes accumulating funds administratively simpler while accumulating.
More on crediting falls outside this article; that's tax territory and the rules change regularly.
Reinvest or withdraw?
The difference is larger than people expect. Starting point: €100,000, 3% dividend, 4% price growth, thirty years.
| Strategy | Final capital | Withdrawn | Together |
|---|---|---|---|
| Reinvest dividends | €761,226 | €0 | €761,226 |
| Withdraw and spend dividends | €324,340 | €168,255 | €492,595 |
Anyone withdrawing and spending their dividends for thirty years ends up with €268,631 less in total. Not because withdrawing is wrong, but because every euro withdrawn stops earning. That mechanism is set out in the article on compound interest.
The practical conclusion: reinvest while accumulating, and start withdrawing when you need the income. That sounds obvious and often goes wrong in practice, because distributed dividends sit in your account where they easily disappear.
Dividends and stopping work
For anyone calculating towards financial independence, one point changes the whole picture.
You don't need your full spending in dividends. From state pension age, both pensions arrive and take over a large part. What you must draw from dividends or withdrawals is the gap, and that's considerably smaller than your annual spending.
At €40,000 of spending, €18,000 state pension and €12,000 occupational pension, that gap is €10,000 a year. At a 3% yield that requires €333,333, not the €1,333,333 your full spending would demand.
And for the years before your state pension date it makes no difference whether the money comes from dividends or from selling. What counts is the total return. How that calculation works is in the article on your FIRE number.
How Gylder fits in
Tracking dividends is laborious, because they arrive from different positions at different moments with different withholdings.
Gylder tracks per position what you've received, gross and net, and shows your expected annual dividend income including reductions when a company cuts its payment. There's a payout calendar, so you can see when what arrives.
And yield on cost is calculated per position, so you see the figure from the table above for your own portfolio rather than for an example.
That last part is more work than it looks: it requires your purchase prices and every distribution since that purchase to sit together. In a spreadsheet that breaks down after a few years.
What this doesn't tell you
Dividends aren't guaranteed. Companies can cut or stop their payments, and do. A past yield says nothing about next year.
The 5% dividend growth is an assumption. Historically, dividend growth on broad indices ran at roughly inflation plus a few percent, but that's an average over long periods.
Tax treatment falls outside this article. Withholding, crediting and the treatment of your wealth are subjects in themselves, and the rules change.
This isn't advice. Whether dividend investing suits you depends on your goal and horizon.
Frequently asked questions
What is a dividend? The share of profit a company pays to its shareholders, typically one to four times a year.
How much money do I need for €1,000 a month in dividends? At a 3% yield, roughly €400,000. At 2% it's €600,000 and at 4% €300,000.
Is a high dividend yield better? Not automatically. What a company pays out is no longer in the price, and companies paying out heavily usually grow more slowly. Look at the total return.
What is yield on cost? Your dividend divided by what you originally paid, rather than by the current price. With growing dividends that figure rises, even as the current yield falls.
Should I reinvest my dividends? While accumulating, yes. Anyone withdrawing and spending for thirty years ends up with €268,631 less in the example above.