Why I Don't Use the S&P 500 as My Benchmark for Financial Success

For as long as most of us can remember, how well the market has provided returns to people has been based on the S&P 500. This isn’t all that unsurprising considering that since 1957, the S&P 500 has delivered an average annual return of approximately 10.33%.

However, one Redditor is shrugging their shoulders at his number, according to a post they wrote on the r/dividends subreddit. They believe that too many people wrongly use the S&P 500 as a success benchmark, when they could be looking at alternative measurements.

Does Anyone Else Feel the Same?

Most investors, including some of the biggest names in finance like Warren Buffett, consider the S&P 500 the gold standard for measuring investment performance. Even the Redditor acknowledges that many people make this their benchmark of success.

In all fairness, the Redditor isn’t wrong, as it is the 500 biggest companies in America, and you do get a pretty diverse set of interests. Just about every major vertical, like tech, energy, healthcare, finance, and everything in between, has some kind of representation on the S&P 500.

The Redditor’s point of view is slightly different, though, as they don’t mind if they underperform or have to pay more taxes along the way. Given that they are posting in the dividend subreddit, there is a case to be made that they would rather stick to stocks or funds that are giving out substantial dividends regularly and grow passive income rather than worry about growth stocks.

Ultimately, all this Redditor is worried about is having enough dividends coming in every month to cover all of their expenses. To them, this is all that matters, but does anyone else feel the same?

For Most People, Dividends Are The End Game

There is a definite discussion to be had about whether or not you should or can invest in growth stocks before dividends. In fact, this is what most people who focus on investments as a means to retire and grow wealth consider. The whole idea is to grow enough wealth through growth stocks while you are still saving for retirement, so that you can then convert one day into retirement income through dividends.

For the Redditor, they are simply skipping over one step here, and this step happens to be the one that most people use the S&P 500 as guidance for. If they went down the popular path, they would be investing money into this benchmark to stack money because of its historically good returns.

Once those returns have grown to a certain point, that is when you start shifting funds into dividend returns that can create passive income. Whether you are entirely reliant on this passive income for retirement or it’s simply in addition to other income like an IRA or 401(k) isn’t really the important thing.

What To Do Next

For this Redditor, the very best thing they can do is figure out how to minimize their tax liabilities on dividend earnings. While they might indicate they aren’t worried about paying more in taxes to invest in passive income over growth, this doesn’t mean they shouldn’t explore ways to manage this tax burden effectively.

The first step here would be to focus on qualified dividends, which are taxed at a more favorable long-term capital gain tax rate. Generally, this means your tax burden on qualified dividend earnings is usually 0%, 15%, or 20%, as opposed to ordinary dividends, which are generally taxed at your income level, so taxes, in this case, can be as much as 37%.

Separately, you could keep these dividend investments in a Roth account, in which case qualified withdrawals are going to be tax-free, including the earnings from dividends. This won’t absolve you from taxes altogether, as the contributions made are done with after-tax money, but it will save you in the long run.

In addition, this Redditor should be focused on DRIPs, which is a popular term in this subreddit. This basically means that dividends are automatically reinvested into purchasing additional shares of a company. The dividends will still be reported as income, but only if they are held in a non-retirement account.

The bottom line is that this Redditor has some options to save on taxes, especially if this is the investment line they are going to be holding in the long run.