Are You Still Dependent on Your Employer’s Salary – or Can You Already Live from Your Passive Income?
The earlier the wake-up call, the higher your chances of building enough wealth during your working years so that one day you can transform it into a portfolio of dividend-paying stocks. Dividend-paying stocks are attractive because they turn your investments into a steady cash flow stream. Instead of selling assets to cover living costs, you receive regular payouts that can help you finance your lifestyle in retirement.
But before you celebrate financial freedom too early, let’s look at the hidden downsides of dividends and why timing is everything.
During your wealth-building years, chasing dividends too early can actually slow down your journey to financial independence.
The Three Hidden Drawbacks of Dividends in Your Private Wealth
1. Higher Tax Burden
Dividends are treated as ordinary taxable income. The more you receive, the higher your marginal tax rate. Essentially, every dividend is shared with the government – often substantially reducing your net return.
2. Loss of Compounding Power (and Extra Costs)
Dividends feel good because they put money in your account. But every payout is money leaving the company’s growth engine. If you don’t reinvest it, you miss out on the compound effect – the true driver of long-term wealth building.
And if you do reinvest? In practice, you often pay high transaction and bank fees. Worse, since reinvestment usually happens only once per year, you effectively lose a year of return just to finance your bank. Over decades, this erodes significant wealth.
3. Sector and Risk Concentration
Dividend-heavy portfolios are often overweight in financials, utilities, and pharma, while growth sectors like technology are underrepresented. That means your portfolio may look diversified, but in reality, you’re heavily exposed to mature, low-growth industries – with all the risks that brings.
Smarter Wealth Growth in Switzerland
If you’re in the wealth accumulation phase, the strategy should look very different:
Capital gain stocks first: In Switzerland, capital gains on private investments are tax-free. That makes growth-oriented stocks far superior for young investors building long-term wealth.
Swiss real estate: Also attractive, but beware – here we leave the capital gains tax exemption. The shorter you hold the property, the higher the tax burden on resale.
Dividends during accumulation: If at all, they belong in the 3a pillar, where income and gains are shielded from taxation. With good product selection, fees can also be kept very low.
When Dividends Finally Make Sense
Dividend strategies in your private wealth only make sense once your employment income disappears or is reduced. At that stage:
You have already built your wealth through capital gains and tax-optimized investing.
Dividends then serve as a complementary income stream, helping you cover expenses without liquidating large chunks of capital.
With a shifted investment approach, you can extend the lifespan of your wealth by living primarily off its yield rather than consuming the principal too quickly.
The Bottom Line
👉 In your younger years: focus on tax-free capital gain.
👉 During the accumulation phase: keep dividends stocks in your 3a account.
👉 In retirement: shift toward dividends as a cash flow tool.
Financial independence is not about chasing dividends early – it’s about building wealth smartly, then harvesting it wisely.