Chapter Nine: Create Wealth Through Total Return

Revised and updated | Build Wealth with Common Stocks: Market-Beating Strategies for the Individual Investor

David J. Waldron

Sep 11, 2025

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Chapter Nine

Create Wealth Through Total Return

Focusing only on dividend yields and ignoring growth leads to poor results. Build wealth through total-return investing — capital gains plus income — so that, in retirement, you can enjoy your bucket list instead of depending on higher dividend payouts.

I rebalance our family portfolio about once a year — by adjusting the holdings to maintain asset allocation — treating it as a total-return vehicle rather than just income. Remember, dividends offer short-term compensation while waiting for the stock’s long-term capital appreciation.

This chapter explains why and how total return is the best approach for the thoughtful, disciplined, and patient investor.

Practice Total-Return Investing

Quality dividend value investing, or total return, concentrates on dividend yields below 5 percent, a range where you find strong companies paying significantly less than 100 percent of earnings in dividends, also known as the payout ratio, discussed later in this chapter.

Many companies with 6 to 10 percent or higher-yielding shares must increase their dividend rates, or the stock prices need to decline, or both, for the dividend yields to stay high or rise. These are risky scenarios.

It is uncommon for popular trends to serve as solutions for struggling investors. Time and again, each investment fad proves damaging to portfolios. As discussed in Part II, Chapter Twelve, the prudent investor favors companies where the average of trailing dividend yields plus the yields on earnings and free cash flow surpasses the current Ten-Year Treasury rate. Still, we cannot predict the future with certainty and should not do so at the risk of our portfolio and the family it supports.

Although safer than high-yield dividend or non-dividend growth investing, dividend-paying value investing still shares the inherent risks of the stock market. All dividend stocks face the possibility of unexpected rate reductions or suspensions by the company’s board of directors. The dividend-paying common shares of quality companies generally tend to be less susceptible to ticker price volatility and market liquidity issues than high-yield dividend or non-dividend growth stocks.

All the Rage for the Wrong Reasons

High-yield dividend stocks were on investors’ minds for higher payouts during the low-interest-rate environment of the post-Great Recession bull market.

Many popular financial subscription and media articles focus on the high-yield trend. History shows that the crowd is almost always wrong about fads and favorites. High-yield dividend stocks — defined as those with yields of 6 percent or more on common shares — are no different, and that’s why I remain consistently bearish.

Along with high returns, looming risky headwinds, and questionable underlying fundamentals, just ask the victims of the high-yield junk bond bubble in the 1980s. Perhaps the recent bull market and its high-yield equity opportunities are different; the perma bulls rejoice.

The junk bond craze resurfaced during the recent bull market through high-yield dividend stocks. History shows how the previous bubble burst during the stock market crash of 1987. This time, instead of relying on leveraged mergers and acquisitions when available capital was limited, high-yield equities fueled risky bets as retail investors and advisors chased bigger returns to boost returns from underfunded retirement account balances.

Defining high-yield equity is subjective and broad. Therefore, this chapter defines high-yield dividend stocks as publicly traded equities that pay at least three times the Ten-Year Treasury rate, which was 1.92 percent as of December 31, 2019. Consider 6 percent or higher as the ideal threshold for high-yield equity. In the context of the COVID-19 pandemic, consider the sub-1 percent rates of 2020 as an anomaly.

An inevitable cyclical decline in the overall stock market ultimately impacts the capital invested by millions of retail investors, who focus on high-yield dividend stocks, such as business development companies (BDCs), master limited partnerships (MLPs), and real estate investment trusts (REITs). Wise investors never buy stocks solely based on market hype or high dividend yields.

His Neighbor Yelled, ‘Buy the Yield’

For some background, high-yield dividend investing caught my attention earlier in the post-Great Recession bull market, thanks to a retired family member.

Acting on a tip from a neighbor — mistake number one — he transferred a significant amount of capital from a well-known, blue-chip equity REIT to the unpriced, non-marketable security of a high-yielding hotel REIT.

The REIT staple was sold to generate capital and ended up as a seven-bagger stock, with an average annual dividend range of approximately 4 to 5 percent in the following years. As promised, the unpriced hotel REIT paid significantly higher dividends, and the security went public in due course at roughly the projected initial cost per share.

On the verge of the COVID-19 coronavirus correction, the publicly traded hotel REIT’s price had fallen 15 percent since the IPO, although it continued to pay healthy dividends. An overall insufficient result, as it amounted to a no-bagger, contrasting sharply with the seven times return of the blue-chip REIT sold to raise capital for the high-yield, unpriced security.

The misfortune of the family member illustrates the risks associated with unpriced securities. Whether priced or not, it was some brokers’ practice to persuade retirees to sell below 5 percent stable yielders for the 6 to 10 percent plus yields of risky equities. Once again, caveat emptor applies.

The allure of high yields on a stock often overshadows the essential due diligence needed to determine if the company is stable enough to justify the yield through capital investments and shareholder returns from a well-managed operation. Do we prefer to own a quality 4 percent yielder with a compounded average capital gain of 6 percent annually, or a high-risk stock yielding 10 percent, even if it averages a negative 5 percent annual capital loss?

In the first case, the value investor averages a gain of over 10 percent annually. In contrast, the high-yield enthusiast settles for a modest 5 percent average annual total return.

Some retirees might have had the opposite experience, investing in high-yield stocks that delivered double-digit total returns each year during the recent bull market. Like a wild party, this bubble burst when the coronavirus pandemic hit unexpectedly. High dividend investors who believe they can time the perfect exit are sailing on the proverbial ship of fools.

Chasing Yield: A Guide to Risky Investments

Many top financial advisors, bloggers, and investors concentrate their research and investment efforts on high-yield dividend strategies, such as REITs, BDCs, and other closed-end funds (CEFs), as well as energy transfer partnerships and preferred stocks.

For those wondering why the book is partial to common shares, preferred stock is an equity instrument that functions like a glorified bond with an emphasis on dividends. Although preferred shareholders do not have voting rights, they receive a portion of the earnings before the common shareholders. If you are committed to owning small slices of high-quality companies, there’s less concern about waiting for payment. Therefore, consider the secondary dividend, the first voting rights — and, more importantly — the capital gains of the common shares of strong, enduring companies.

Some well-crafted story headlines and marketing pitches cast a positive spin on the paradox of ‘safe,’ high-yielding investments. Such absurdity is akin to fishing for sushi-grade salmon in a crystal clear river known as toxic from a colorless pollutant.

As expected, these pundits remind me of what I missed, overlooked, and stumbled over in my analysis, challenging some of my assumptions and conclusions. Although professional debate is encouraged and welcomed, my main point remains that investors are more focused on dividends than on enterprise quality with high-yield stocks. Still, if a careful trading strategy prioritizes income over capital gains, so be it, with cautious best wishes.

Remember, dividend rates adjust on a monthly, quarterly, or annual basis based on board-approved payouts, and the associated yields fluctuate daily due to changes in the stock price. The idea of dividend payouts follows a simple principle in the basic economics of the price/yield relationship, whether for bonds or stocks. When the price increases, the yield decreases, and vice versa.

The Alternative High-Yield Dividend Strategy

Focus on a stock holding’s yield based on cost, rather than pursuing current dividend payouts.

The return on cost shows the yield of the current dividend rate compared to the cost basis of the common shares. For example, as of this book’s September 2025 update, the yield on cost for each of the top five holdings of The Model Portfolio was much higher than the current forward yield.