Is David’s Dividend Strategy Perfect For Today’s Market?

David Bahnsen – founder of The Bahnsen Group and author of The Case for Dividend Growth – centers his investment philosophy on dividend growth investing.

In his view, a fundamental mentality shift is needed where investors need to focus on the cash income their portfolio generates rather than obsessing over short-term market prices. As far as he’s concerned if you aren’t immediately selling your stocks to meet a need, their momentary “resale value” is largely immaterial. Instead, what matters is the growing stream of cash they produce.

In his view, owning stocks is akin to owning a business, so the health of the investment is measured by its cash flows and hence dividends over time, not by daily price quotes. He puts it bluntly: all investors, whether “growth” or “income” oriented, ultimately invest for the receipt of cash, and “the rest is just details”.

This dividend-centric approach means prioritizing income growth as “the very end to which we work”. Bahnsen emphasizes that a rising dividend signals a company’s success and shareholder alignment, whereas a shrinking or stagnant dividend is a warning sign.

He notes it can be counter-intuitive at first – for example, a dividend investor might be unhappy if stock prices rise but dividend income falls, because that implies the business’s cash generation is weakening. In short, Bahnsen’s philosophy reframes stock investing from speculation on price movements to ownership of productive assets that send cash to investors regularly.

Key Points

• Bahnsen prioritizes growing dividend income over short-term stock price movements, viewing stocks as businesses measured by cash flow, not market volatility.

• He invests in financially strong companies with consistent dividend growth, avoiding risky high-yield stocks and selling those at risk of cutting payouts.

• Dividend reinvestment fuels long-term wealth, while steady payouts provide downside protection and keep investors disciplined during market swings.

David Bahnsen Dividend Strategy

When Bahnsen picks dividend stocks, he tends to targets companies with a long history of growing their dividends. One example of this is his dividend ETF that holds 25–35 companies that have demonstrated reliable dividend increases over multiple market cycles, usually >5% annual dividend growth over 5–7 years. Those kind of increases are really only possible when the business has a wide moat and can hike prices consistently year after year.

Usually, Bahnsen picks up stocks yielding more than the S&P 500’s average yield, so they offer a “premium” income stream. At the same time, he tends to steer clear of high yields because an unusually high yield is a red flag that maybe some balance sheet issues exist.

Bahnsen’s research is usually concentrated on companies with pretty solid financials, meaning balance sheet strength, stable earnings growth, reasonable leverage, strong free cash flows, and reasonable payout ratios before investing. These factors ensure the dividend is well-supported by actual profits. For instance, his fund explicitly evaluates a company’s free cash flows and debt levels to confirm it can sustain paying out and raising dividends comfortably.

Bahnsen views a dividend as management’s “communication” that results are real. In his opinion, dividend payers tend to eschew value-destroying acquisitions or excessive debt, which in Bahnsen’s view keeps them financially healthy.

He really tries to avoid stocks that will potentially cut their payouts and his team monitors holdings and will sell a stock if its dividend is at risk or declines. This sell discipline helps protect against permanent loss of income or capital. In practice, if a company’s business thesis deteriorates or management fails to maintain the dividend growth trajectory, Bahnsen will remove it from the portfolio. By culling potential dividend cutters, he tries to preserve the integrity of the income stream.

Although Bahnsen’s portfolios are relatively concentrated into a few dozen stocks, he includes a mix of small, mid, and large-cap dividend growers across sectors. The common thread is quality and resilience, not any one industry. Over time, even traditionally “growth” sectors like technology have produced dividend payers, such as tech giants initiating dividends after maturing. “Technology is proving this true of entire sectors”, he notes. The key is that the business, regardless of sector, has a durable competitive edge and cash flow to keep raising dividends.

By adhering to these principles, Bahnsen constructs portfolios of “strong companies with a long history of growing their dividend”, but with a “nuanced, bottom-up approach” – recognizing “not all dividends are created equal.” In other words, he doesn’t simply buy any dividend stock but rather he cherry-picks those that meet strict quality and growth benchmarks.

Unique Strategies in Bahnsen’s Dividend Approach

A core mantra of Bahnsen is that dividends are real in a way that stock price fluctuations are not. “A dividend is real money leaving a company’s real account to go to your real account.”  It highlights that dividends are actual realized returns, whereas a rising stock price is just a paper gain until you sell.

He even uses a tax analogy that, just as paying taxes means you truly earned that income, a company paying a dividend means those earnings were genuinely there. This insight emphasizes why he values dividends as a sign of true profitability. He makes the statement that “a dividend is a communication from management: ‘This much of our results is real.’”  By focusing on cash payouts, investors ground their expectations in tangible results rather than fickle market sentiment.

Bahnsen contrasts dependence on market speculation and a dividend-focused strategy. An index investor’s returns often rely heavily on unpredictable P/E multiple expansion, which is “completely controlled by the wind” of market psychology. In contrast, dividend investors can control their outcomes better by selecting companies that reliably grow dividends.

We cannot select or identify an ‘ability to grow the multiple’… The valuation just happens. The dividend is something management has agency over,” Bahnsen writes.

In practice, this means he deliberately tilts portfolios toward the controllable drivers of return, such as cash flow growth, and away from gambling on ever-rising market valuations. This approach is intended to reduce reliance on luck or timing and instead hones in on steady cash generation that management can deliver.

Bahnsen argues that dividend growth investing provides a powerful combination of offense via growth and defense via income and downside protection. He even calls it a “mathematical miracle” that offers both attributes and “stands the test of time”.

The “offense” comes from reinvesting dividends and compounding income over years. For example, he likens reinvesting dividends to using rental income to buy more rental properties that you continuously purchase more assets that generate even more income. This accelerates wealth accumulation, effectively putting compounding on steroids.

The “defense” comes from the stability of dividend payers and the cushion that cash payouts provide. Bahnsen notes that companies with long dividend histories tend to be mature, essential businesses, such as staples and utilities as well as seasoned tech firms that can weather downturns. Their stock prices typically fall less in bear markets, and their dividends can provide a floor under returns. He cites that in major market crashes (2000, 2008, 2022), dividend growth stocks suffered 10–20% smaller drawdowns than the broader market, a significant resilience advantage.

Moreover, receiving cash every quarter is like getting paid to wait and it can offset losses and even allow reinvestment at lower prices during downturns, positioning the portfolio for recovery. “Even apart from the cliché that the best offense is a good defense, dividend growth investing is uniquely positioned for the years ahead,” Bahnsen writes, because it shifts return generation toward reliable cash flows and away from volatile market multiples.

An often overlooked aspect Bahnsen highlights is the psychological benefit of dividend investing. Focusing on a growing income stream encourages a long-term mindset and helps investors stay disciplined through market volatility. When dividends keep rolling in, investors are less tempted to panic-sell in a downturn, since they continue to see tangible rewards for holding stocks.

In Bahnsen’s words, dividends “provide the cash that a withdrawer can live off of when markets are down,” so one doesn’t have to liquidate shares at depressed prices. This can prevent the “negative compounding” that happens when selling low locks in losses.

Bahnsen considers riding bearish downturns a crucial part of managing sequence-of-returns risk in retirement and argues that dividend-paying companies impose financial discipline on themselves because management knows they must fund the dividend, and so they are less likely to engage in wasteful spending, excessive debt, or flashy but unprofitable projects.

Overall, Bahnsen sees the dividend approach as leading to long-term business performance and less about short-term price noise.

One of Bahnsen’s catchphrases is that he’s not buying stocks merely to collect dividends, but rather buying dividends to get the stocks. You can interpret this to mean that the dividend itself is a signal of quality and he is attracted to companies because they pay and grow dividends. Or in other words, the dividend is a signal that the company has a healthy, profit-generating business.

In a “world of crazy accounting,” a consistent dividend is a truth-telling indicator of genuine earnings. This flips the usual script: instead of viewing dividends as a byproduct, Bahnsen uses them as a filter to find companies worth owning. If a firm can regularly increase its payout, it suggests real growth, shareholder-friendly management, and confidence in future earnings. In essence, the dividend is the proof that draws him to the stock, creating a high-quality portfolio almost by default. (Of course, he still conducts deep research on fundamentals as noted, but the dividend track record is a critical initial litmus test.)

These insights collectively illustrate why Bahnsen champions dividend investing as a strong, repeatable strategy. It’s not just about receiving income but rather is a holistic approach that leverages the tangible, controllable aspects of equity investing, including cash flows, compounding, business fundamentals, to achieve solid returns and smoother ride for investors.

As Bahnsen puts it, this focus on dividends “redirects portfolio focus to goods and services that are needed… and where the people running the company have so much confidence in ongoing prospects that they choose to write a check with real money” to shareholders. That real money, paid consistently, is the cornerstone of his strategy.

Why Is Bahnsen So Dividend Focused?

Dividends have historically been a major component of stock market returns. Bahnsen often points out that there were eras when dividends accounted for half or more of the market’s total return. For example, in the mid-20th century, a significant portion of equity gains came from the yield and reinvestment of dividends.

Even in more recent decades, if stock price appreciation was modest, dividends made up the bulk of what investors earned. He notes that in “bad” decades, dividends could provide over 100% of the market’s return, meaning prices ended lower than they began, and only dividends delivered gains.

The “lost decade” of 2000–2009 highlighted this when the S&P 500’s index price was roughly flat over ten years and so, absent dividends, investors would have had virtually no return. That period, bookended by the dot-com crash and the 2008 financial crisis, reinforced for Bahnsen that relying solely on price appreciation is risky.

In contrast, a dividend-focused investor still collected cash throughout those lean years, softening the blow. This historical context taught investors “what investing is supposed to be about” – fundamental returns – and Bahnsen seized on it as validation of the dividend approach.

Bahnsen’s philosophy boils down to the idea that cash flow is king. No matter one’s investment style or risk profile, the end goal is to eventually derive usable cash from one’s investments. Dividends simply make that cash return explicit and immediate.

Instead of hoping that one can sell shares later for a profit, which is the “greater fool” theory of finding a higher bidder, dividend investing realizes returns along the way. This aligns investing with the basic purpose of business ownership: to receive a share of the profits.

Bahnsen notes that all successful companies eventually tend to return cash to shareholders and it’s the natural progression of a maturing business. Even high-growth companies, as they mature, start paying dividends or buying back stock (which is another form of returning cash). By focusing on those that do, Bahnsen is essentially backing companies that have “stood the test of time” and proven their profitability.

He views dividends as validation that a company is profitable enough to reward investors, and not just accounting-rich. It also resonates with investors’ needs, especially retireesm who require regular income. Rather than selling assets to generate cash, which can erode the portfolio, investors can live off the dividends that Bahnsen sees as a safer, more sustainable withdrawal mechanism.

Another rationale is that focusing on dividends emphasizes the proper role of a corporation to reward the risk-taking capital providers, ie. shareholders, when the business succeeds. “This is the reason dividends were put on planet Earth… to validate the very essence of a profit-seeking company in need of rewarding its risk-taking investors,” Bahnsen writes.

In other words, paying dividends is part of a healthy capitalistic cycle – a company makes money and returns a portion to the owners, who can then reinvest or spend it as they please. Companies that pay and grow dividends demonstrate a partnership with shareholders. This focus also instills management discipline.

Corporate executives know that cutting the dividend is punished by investors, so they strive to maintain prudent finances. Bahnsen likes this alignment because it weeds out companies that might squander earnings on empire-building or speculative projects. Instead, management is motivated to maintain steady growth and profitability to keep those dividends flowing. So, dividend focus can lead to better corporate behavior, in his view.

Bahnsen sees dividend growth stocks as a sensible strategy for uncertain times, a point that is especially relevant in the post-crisis, low-rate world. Dividends provide a return cushion even if markets go nowhere or valuations contract.

As he notes, if P/E ratios are high, there’s a risk they could revert to the mean and drag down prices. In those scenarios, having a solid dividend yield means you’re still getting something back. It’s a way to “get paid while you wait.”

Moreover, dividends that grow faster than inflation offer a hedge against rising prices. A bond’s interest is fixed, but a company that raises its dividend 5–10% per year can preserve or even increase an investor’s purchasing power over time.

Bahnsen underscores that dividend growth is not “fixed” income because your income can go up annually, which is hugely valuable in an inflationary environment. This built-in growth of income is one reason he calls dividend stocks “anti-fragile” in volatile or inflationary conditions – they adapt and often thrive by increasing payouts, whereas fixed coupons do not.

Finally, Bahnsen’s focus on dividends is rooted in practical financial planning. In accumulation years, reinvested dividends compound wealth dramatically, referred to as the “eighth wonder of the world on steroids.”

In withdrawal years, dividends provide a steady paycheck from your portfolio, avoiding the need to time the market. This versatility, meaning growth-of-income when you don’t need the cash, and income when you do, makes dividend investing a lifelong strategy, not just a niche.

Bahnsen illustrates that a portfolio yielding, say, 3–4% with rising dividends can support a retiree’s spending needs, without draining the principal by selling shares. That rationale is compelling for those wary of outliving their money or being forced to sell in a downturn.

The long and short can be summarized as the rationale for Bahnsen’s dividend focus is that it aligns investing with real economic returns or cash profits and has stood the test of history by providing reliable returns even in challenging decades. In addition, it serves investors’ practical needs of growth, income, and capital preservation.

He believes this approach harnesses the fundamental purpose of equity investing – participation in business prosperity – in a way that minimizes reliance on speculation and maximizes the probability of reaching one’s financial goals through a steady, growing cash flow.

Does Bahnsen’s Dividend Approach Work?

Bahnsen staunchly defends his dividend strategy not just with theory, but with historical evidence and actual performance data. He argues that far from sacrificing returns, a well-executed dividend growth approach has delivered competitive and even superior results over time:

According to Bahnsen, dividend growth stocks have at least matched, if not beaten, the broader market over meaningful periods. “Dividend growers have performed better than the entire market in every long-term period I have ever analyzed, and done so with less portfolio volatility,” he notes.

While he cautions that past performance doesn’t guarantee the future, history has shown that an index of companies consistently raising dividends tends to outpace the general index over multi-decade spans. This claim is supported by other research as well, such as the S&P Dividend Aristocrats index, which tracks companies with 25+ years of dividend hikes, has historically exhibited strong returns with lower risk.

Bahnsen’s book and writings cite numerous studies and examples to bolster this point. In essence, the data suggest that focusing on high-quality dividend payers has not been a return handicap, but instead it’s often been an edge.

One of the strongest historical advantages of dividend strategies is how they hold up in bad markets. During the 2000–2002 dot-com bust and the 2008–2009 financial crisis, dividend-centric portfolios declined much less than the market averages.

Bahnsen highlights that in each of the last three major bear markets in the early 2000s, 2008, and even the 2022 downturn, dividend growth stocks experienced about 10–20 percentage points smaller peak-to-trough losses compared to the S&P 500.

This defensive resilience can dramatically improve long-term outcomes because avoiding deep losses means less need to “dig out” of a hole subsequently. For example, in 2022’s bear market, Bahnsen notes that some well-managed dividend growth portfolios were actually up +6–7% for the year, even as the S&P 500 fell nearly -20%.

That kind of divergence spotlights how dividend payers, especially those in stable industries like consumer staples and healthcare, can buoy a portfolio when most stocks are sinking.

Conversely, in euphoric bull runs dividend strategies might lag slightly because they are often underweight high-flying tech startups or speculative names. Bahnsen openly acknowledges that in “years of real market blowout strength dividend portfolios may or may not be up as much as the market”. But over a full cycle, the smoother ride of smaller declines and decent participation in rises, leads to equal or better cumulative performance.

Bahnsen’s approach aims for a blend of decent current yield and growth. Investors get a significant portion of their return in cash each year, plus capital appreciation in line with earnings growth. Over long periods, this combination can rival the returns of growth stocks and with fewer ups and downs.

In fact, Bahnsen presents evidence that dividend growth investing “offers a cash return on investment that exceeds index investing over time with less volatility”. This evidence may include backtests or studies showing that a strategy of buying companies that regularly hike dividends would have produced strong risk-adjusted returns.

Many academic and industry studies echo this. For example, studies by Hartford or Tweedy Browne have shown dividend growers outperform non-payers. Bahnsen’s own experience managing client portfolios for decades gives him confidence that the strategy is effective through various market regimes.

A practical measure of Bahnsen’s effectiveness is how his managed portfolios and products have fared. By 2024, his success allowed him to launch the TBG Dividend Focus ETF (TBG), an actively managed fund of dividend growth stocks.

Within a little over a year of inception, the fund had surged by +27.3% from November 2023 launch to end of 2024 outperforming many benchmarks in that period. It also quickly gathered over $100 million in assets, suggesting investor confidence in the strategy. While that’s a short timeframe, it’s a concrete example of his philosophy in action.

Furthermore, Bahnsen has attracted endorsements from respected investors like John Mauldin, who not only praised The Case for Dividend Growth as “the best and easiest to read book on dividend growth strategies”, but also entrusted Bahnsen’s team to pick dividend stocks for him.

Mauldin noted that the “dividend all-stars” Bahnsen selects provide “far higher dividends and reduced volatility” compared to the broader market. Such testimonials and track records lend credence to Bahnsen’s claims that dividend investing can be both lucrative and reliable.

Of course, results can vary with market conditions, and no strategy wins every single year. But historically, the dividend-focused approach has delivered a compelling risk/reward profile. By capturing a steady cash yield and enjoying the compounding of reinvested dividends, investors have often matched or exceeded the total returns of non-dividend stocks and done so with smaller swings in portfolio value.

Bahnsen often reminds readers that through “every long-term period” he’s studied, this approach has “never come at a cost over the long term” in terms of performance. In other words, one did not have to give up returns to get the added stability; historically, you got both. This track record is a big part of why he remains passionately committed to the dividend growth ethos.

Criticisms of Bahnsen’s Dividend Philosophy

While Bahnsen makes a strong case for dividend investing, it’s not without critics or potential pitfalls.

One criticism is that Bahnsen’s stock selection leans heavily on past dividend behavior as a predictor of future success. Skeptics argue this might violate the warning that “past performance does not guarantee future results.” A company that raised dividends for 10+ years could still stumble due to unforeseen challenges.

As one observer noted, picking stocks for their past dividend growth implies past performance will continue – a “serious no-no” in investing.

By focusing only on dividend-paying stocks, an investor inherently excludes many high-growth companies that choose to reinvest all profits rather than pay dividends. Some of the market’s biggest long-term winners, especially in technology, started out paying no dividends for years.

Dividend strategies often end up concentrated in certain sectors, typically value-oriented sectors like utilities, consumer staples, real estate, telecoms, banks, and energy, which traditionally pay dividends. They tend to underweight sectors like technology or biotech where payouts are less common. This can mean less diversification and possibly a bias toward slower-growth industries.

If those sectors face specific headwinds, such as regulation, commodity price swings, etc, a dividend portfolio could feel the pain. Bahnsen does include some tech or mid-cap growth names that pay dividends, but by design he’s fishing in a more limited pond.

As hinted, one drawback is that in roaring bull markets led by speculative fervor, a disciplined dividend portfolio might lag. Bahnsen himself concedes that in years of extreme market upside, his strategy “may or may not be up as much as the market”.

We saw this in 2020–2021 when many tech and concept stocks with no dividends skyrocketed; dividend stocks, being more “boring,” didn’t all keep up. For investors purely seeking the maximum possible capital gains in short periods, dividend strategies could feel slow. The flip side is that they also don’t drop as hard in busts, but patience is required during those go-go years when others might be chasing high-fliers.

Bahnsen has mentioned the tax advantages of qualified dividends, taxed at long-term capital gains rates, which are lower than ordinary income tax. But it can’t be overstated that not all investors benefit equally because in taxable accounts, receiving dividends means paying taxes on that income each year.

The other side of the coin is that a growth stock which pays no dividend allows an investor to defer taxes until they choose to sell and potentially realize mostly capital gains. For investors who don’t need current income, a non-dividend approach might be more tax-efficient. Bahnsen argues the tax rate on dividends is low, typically 15-20% and so the benefits outweigh the tax cost, but investors in higher tax brackets or those who want maximum deferral might see this as a con.

Another criticism comes from the Bogleheads/indexing camp: Bahnsen’s strategy involves active stock picking and often higher fees than passive index funds. For instance, his new Dividend Focus ETF charges about 0.69% in annual expenses, which is considerably higher than broad-market ETFs or even many passive dividend ETFs.

Some skeptics suggest that his promotion of dividend investing is also a way to attract clients to fee-based management or proprietary funds. One forum commenter dryly observed that Bahnsen, a successful advisor, “wants his cut,” implying his firm profits from marketing this approach.

High fees can eat into the very outperformance that dividend stocks might provide, so an investor should be mindful of implementation costs. If one can replicate the strategy on their own or via a low-cost vehicle, the results would be more compelling than if paying a hefty advisory fee.

Critics also contend that there’s nothing magical about dividends per se because they’re just one mechanism for returns. Detractors sometimes cite the Modigliani-Miller theory that in an ideal world, whether a company pays a dividend or retains earnings shouldn’t affect total return since the investor could sell shares to create “homemade” dividends.

From this perspective, Bahnsen’s philosophy might seem to overweight a factor, cash payouts, that is conceptually redundant. One Bogleheads member commented that they don’t see any “secret sauce” in what Bahnsen offers; ultimately it’s a form of value investing with a focus on one attribute, dividends, and one could as well stick to a broad index and avoid complexity.

Additionally, picking individual stocks adds risk because some skeptics simply prefer a diversified index approach to avoid stock-specific pitfalls, whereas Bahnsen is effectively running a concentrated portfolio that could underperform if some selections go wrong.

Those who are unconvinced might say: “Perhaps they’re correct and good enough to do that (stock picking), but I’ll never find out because I’ll never be a client… I’ll stick with low-cost index investing”. This encapsulates the view that while Bahnsen’s strategy is well-articulated, an investor must believe in active management and the dividend factor to adopt it, and not everyone does.

In light of these points, it’s clear that Bahnsen’s dividend-centric approach, like any strategy, has its trade-offs. It shines in delivering steady income and reducing volatility, but it may forgo some upside during speculative booms and requires rigorous analysis to avoid traps, such as companies at risk of cutting payouts.

The philosophy also tends to come with an active management layer, which not all investors want to pay for. Bahnsen acknowledges some of these issues in his writings – for instance, he warns against high-yield traps by addressing the quality concern and argues that the long-term benefits outweigh occasional short-term lag.

Nonetheless, investors should be aware that dividend investing is not a one-way ticket to market-beating returns without effort because it requires patience, due diligence, and alignment with one’s financial goals.

David Bahnsen’s perspective on dividend investing is a thoughtfully developed philosophy that elevates dividend growth to the center of an investment strategy. He provides a compelling narrative, backed by historical data, logical arguments, and personal conviction that owning companies which reliably pay and raise dividends can lead to superior investment outcomes.