Objective Getting a good night's sleep is important to ensure we function most effectively in our waking lives. One area that is particularly compromised when adequate sleep is not achieved is affect regulation, which has implications for subjective well‐being (SWB). Through the lens of homeostasis theory, an investigation into the relationship between self‐reported sleep quality, stress, and SWB was undertaken in an Australian sample, with the primary aim to further understanding of the importance of sleep and its role with regard to affect regulation. Method The study included 488 Australian participants (77% female) with a mean age of 28.71 (standard deviation = 10.61) who were recruited via advertisements on social media websites. Participants completed measures of SWB, sleep quality, dreaming, and stress. Results Using a bootstrapped mediation analysis, sleep quality was found to partially mediate the relationship between stress and SWB. These results were further explored using a two‐way analysis of variance, which revealed significant main effects for sleep and stress on SWB, but no significant interaction effect. Finally, those who had nightmares or bad dreams reported higher stress than those who had no bad dreams or nightmares. Conclusion These findings provide preliminary evidence to suggest that the impact of stress on SWB may be reduced when adequate sleep quality is achieved, and contribute to the growing field of literature exploring the function of dreams. The findings provide new insight that can inform therapeutic approaches to sleep disorders and stress management and guide clinical interventions.