Should I invest in dividend stocks to generate income?

Many investors in their 50s and 60s want reliable and sustainable income from their investment assets, fair enough!

You may be wondering whether you should invest in dividend stocks or paying funds to generate income – and that’s a fair question.

The choice often falls between ‘Dividend Shares’ and ‘Distributing Funds’ (both pay dividend income) or ‘Total Return Shares’ and ‘Accumulating Funds’ (do not pay dividends, but accumulate profits in the company or fund).

Important points (I hope!) that you take with you:
• Why dividends feel attractive
• How Irish tax rules affect dividend income
• When bonds can support more stable withdrawals
• How total return investing can provide control and flexibility
• Practical ways to build retirement income without chasing the dividend!

In this piece I want to show how dividends really work, the implications of Irish tax treatment, and the key differences between dividends and a total return approach to your income plan.

And while we won’t get into the weeds terribly deeply here today, hopefully it will help clear up a few things for you.

The Key Difference Between Dividend Stocks and Total Return

Dividend stocks and/or ‘distributing funds’ (which pay out the combined dividends of all the companies in the fund, rather than accumulating them), often look and sound like the obvious answer to generating income in retirement. And that’s understandable, since they both pay out an annual ‘income’ in the form of dividends. Instead of accumulating the dividends back into the company or fund, they pay a portion of the profits to you as a co-owner of the company.

Total return investing is the alternative to dividend investing. If someone invests in individual company stocks/stocks, he would be buying a stock that does not pay dividends. Berkshire Hathaway is a large and popular example of such a company. Oh, if you like running, you may have a pair of Brooks running shoes… and since Brooks is a Berkshire company, it’s good that you support its many lovely shareholders, thank you!

And it’s worth noting that a company like Berkshire, or even an ‘Accumulating Fund’, will often itself own shares of companies that do pay dividends – they simply reinvest and accumulate these dividends rather than paying out to the shareholders of the stock or fund – if you get my drift!

Total return investing through non-dividend paying shares (Berkshire etc.) and through ‘Accumulated Funds’ means that you do NOT receive an annual (taxable) dividend, and you can choose when and how to sell/remove income from the holding. This often provides control and flexibility, especially when planning retirement income.

Read our blog about accumulating or distributing investment funds here

What Some Investors Think Dividends Do (and What They Actually Do)

Many people believe that dividends are a bonus, or a reward for being a loyal shareholder of a direct stock or ‘distributing fund’.
And it’s the icing on the cake, a little extra! In reality, a dividend is when a company distributes a portion of the company’s net profits to shareholders.

And there’s no denying it; Receiving a check every quarter or year or receiving a transfer of funds into your bank or platform account in the form of dividends is certainly not a bad thing!

But dividends ultimately represent a portion of your investment profits.
The company’s value hasn’t magically grown.

Why dividends feel attractive:
• They feel like paydays
• They reduce the emotional barrier to selling units
• They create the illusion of safety; the stock value may drop, but you’ll still get some income!

But here’s the main point
Dividends do not create additional wealth.
They just change the way you receive it.

Take Johnson & Johnson, which is highly regarded (by many) as one of the most reliable long-term dividend stocks, paying out a 3% annual dividend, which is typically the case.

If you own €100,000 worth of JNJ, you will receive c€3,000 gross (before tax) dividend income this year, given their c3% dividend.

Instead of 3k remaining in your portfolio/fund, it is thrown away to you as taxable income.

That may or may not make sense to you, given your circumstances.

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The tax reality of dividends in Ireland

This is where things can change sharply, especially if they are held in non-retirement accounts. Revenue says. ‘Dividend income is added to your other income. The Income tax rate you pay depends on your total income and personal circumstances.’

Therefore, dividends received by an Irish investor are subject to:
• Income tax
• USC
• PRSI (in some cases)
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For benefit funds, ETFs and dividend-paying shares held outside a pension fund, the comparison becomes even more interesting.
Distribution ETFs and funds pay dividends that are taxed every year (under Exit tax!) plus are (at time of writing December 2025) subject to deemed deletion every 8th anniversary.
While accumulating ETFs reinvest the dividends internally in the fund, and only then are taxed every 8th anniversary (at time of writing December 2025) under Deemed Disposal.

Small example

Suppose you receive $5,000 in dividends from an individual stock.
If you are a higher rate taxpayer, your after-tax dividend income in that year could be €2,600, for a total of €50% tax on income.

In addition, you pay CGT of 33% on profits if you subsequently sell units at a profit.

If you received that same ‘dividend’ of €5,000 via a Distributing ETF/Fund, this falls under the rules of exit tax, not income tax!

Depending on your income tax rate, this may work out better for you! The exit tax is from Jan. 2026 anyway 38%.

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If the same stock or fund has reinvested the dividends instead, you’ll only pay taxes when you sell.

Over decades, this difference can slow or speed up growth, which is of course one of the key drivers of long-term growth.

This is why many global evidence-based advisors lean toward total return and away from chasing dividends.

This is even more true if you don’t necessarily want, need, or benefit from dividend income from these investments!!

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Is total return investing the ideal strategy?

The total return is fairly simple.
You concentrate on the overall growth of your portfolio instead of the size of the dividend payments.

It may sound counterintuitive to focus on overall growth when you’re trying to generate revenue!? But it can be very effective, especially if you have a choice of different sources from which to earn income; pension, rental and investment assets.

Why does this work for some investors;
• It protects and promotes composition
• It avoids forced income and taxable events
• It gives you control over when and which assets to sell to generate ‘income’

When you need income, instead of relying on dividends, you decide to sell some of your stock or portfolio.
This is no different from receiving a dividend in practical household finance terms. The economic effect is identical!
The main difference is control, plus it can be more tax efficient!

Example

An investor with a €1 million portfolio from a few funds, broadly invested in global equities/bonds/cash, wants €40,000 this year to subsidize housing and travel!
For example, a dividend-oriented portfolio may yield 2.5% or €25,000 in dividends and the investor should take what the market offers.

Depending on their situation, this is taxed at c50%, so net €13,000 after tax.

A total return investor chooses to sell units to generate the $40,000.
They take the right amount at the right time. They can choose which fund(s) within the portfolio they want to sell to generate this income. They may or may not make a large percentage gain on that $40,000 depending on which part/fund they sell.

You are only taxed on the profit you made on that €40,000, not on the €40,000 itself!

If there was a 10% profit on the €1 million since inception, they take out €40,000 at a 10% profit (€4,000 profit)

They pay 38% (as of January 2026) of €4,000, or €1,520 tax on the €40,000.

This flexibility is powerful when planning for long-term retirement income!

A practical comparison for Irish investors‍

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Most Irish investors want predictable income with reasonable tax efficiency and strong long-term growth.
Depending on their own situation, this indicates a total return approach rather than chasing dividends.

How to generate income without dividends

There are simple alternatives that work better for long-term planning and tax-efficient investments.

The first one I would put forward is to work with a decent financial planner who can help generate income, not someone who just wants to sell you a product! Once you’ve done that, focus on these areas…….

Scheduled recordings

Set up a monthly or quarterly withdrawal from your portfolio or ARF.
This simulates a salary/dividend and increases peace of mind.

Bucket strategies

Delay
• short-term cash expenditures
• medium-term income from bonds/shares
• long-term growth of shares

This supports you through market fluctuations without being tied to dividend decisions and income

Use your pension first

Irish pensions offer tax relief on contributions and a structured withdrawal system.
Often the most income-efficient euro you spend as a pension comes from your pension, if you do so smartly and deliberately.

Check out last week’s blog and podcast to see how different scenarios could benefit households from receiving or not receiving retirement income first!

What we see with customers in their fifties

We work with many professionals in their early to mid-fifties.
They are often fed up with their careers and want the opportunity to step back and start ‘The Next Chapter’!
Some ask the same question; ‘Should I invest for dividends to replace my income?’

And the answer is usually; ‘No!’
Not because dividends are bad – far from it.
But because there is often a more efficient and beneficial approach.

Conclusion — A better way to build income

Dividends can be comforting, but comfort does not equal effectiveness.

When you step back and look at the numbers, the tax rules and the long-term effects, dividends often fall short for Irish investors who want reliable income into their 50s and beyond. Total return investing can provide control, income and long-term asset growth.

There are indeed arguments for a combination of both, if the situation so requires.

If you want income that supports rather than restricts your plans, focus on retirement income planning strategies that protect accumulation and give you choice when and how you draw on your assets.

The right approach can turn uncertainty into clarity and the freedom to just enjoy life, and that’s what we all want!!

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