Some time ago I wrote an article, published here at SA, entitled "Dividend Growth Investing - The End Game". It summarized a withdrawal scheme based on my portfolio. There-in several simulations were presented showing potential withdrawal amounts for different portfolio segments. One suggestion I was trying to convey was that one need be careful about selling shares because once gone, they cannot pay future dividends.

The examples I used, while representative of stocks in my portfolio, did have fairly large (but realistic) dividend growth rates where this was more apparent. In this article I would like to address the case where lower dividend growth rates are assumed. These could occur in cases where 1) the portfolio manager is not selling assets at the first sign of growth decreases thereby reducing portfolio turnover and/or 2) the portfolio consists of ETFs where dividend growths are lower and (in cases) more erratic.

As before, three 40 year overlapping time segments are used with 1942 to 2006 DJIA pricing data. This puts the 1970s bear market decade near the beginning, middle and end of each 40 year time period. Dividend growth is assumed to be the average between an exponential and linear dividend growth rate [DGR]. This would be the case where there would be a 50-50 split between normal C Corp companies and an array of Utilities, REITs, MLPs and Telecoms. The given Yields of 4% and DGRs of 6% reflect that mix.

This analysis will attempt to show that at these lower DGRs, taking some profit in capital gains (selling shares) can be helpful in boosting Total Return, which is the sum of Realized Capital Gains and Dividends. For the amount of shares to be sold, End-of-Year (EOY) values are multiplied by the factor (Z/T), where Z is a number less than one (the major variable in this exercise) and T, which is an extended number for equivalent life expectancy found in the IRS IRA Publication 590, Table III. This is the divisor used for Required Minimum Distributions [RMDs]. It turns out that using this factor does several things; 1) provides assurance that the portfolio is not depleted. At the end of a 40 year period (assumed to be ages 60 to 100), T equals 6.3. 2) Slightly more distribution is permitted at the beginning where T equals 36.4 rather than 40. This makes sense because a 60-year old has a shorter life expectancy. The value of T is adjusted throughout the 40 year period is reflect this shorter to longer life expectancy.

In all simulations, shares were sold at the beginning of the year. These were subtracted from the shares available and dividends drawn from the remainder.

As a result of many previous simulations where the variable Z was exercised in a variety of ways (zero to one; one to zero; larger initial values to zero; and constant values, less than one), it turns out that this last set was, on average, the best. This study will present results where Z is constant throughout the period, ranging from 0.25 to 1.0 in steps of 0.25. A beginning portfolio value of $400K is assumed.

The chart below shows the case where Z = 0.5:

The red curve is returns for the 1942-1981 time period; Green for the 1955-1994 period; Blue for 1967-2006; Light Blue is the case where Z=0, no shares sold, starting at $16.0K, ending at $104.4K. For the cases where shares are sold, Starting Total Returns are $21.3K (initial withdrawal rate of 5.3%) and percent shares remaining is 27.0%. The table below depicts other data:

Z = 0.5 | End Portfolio Value, K$ | Total Withdrawn, K$ | End Withdrawal Value, K$ |

Red: 1942-1981 | 851 | 2706 | 103.6 |

Green: 1955-1994 | 1025 | 2000 | 109.1 |

Blue: 1967-2006 | 1688 | 2594 | 145.5 |

Light Blue: 1967-2006 | 1932 | 104.4 |

It is interesting to note that even though no shares were sold in the last case, ending portfolio values were: Red: 1942 to1981 - $3157K; Green: 1955 to 1994 - $3799K; Blue: 1967 to 2006 - $6260K, with an average of $4405K.

The chart below shows results for Z = 0.25:

For cases where shares are sold, Starting Withdrawals were $18.6K; Remaining Shares 52.3%

Z = 0.25 | End Portfolio Value, K$ | Total Withdrawn, K$ | End Withdrawal Value, K$ |

Red: 1942-1981 | 1651 | 2558 | 124.9 |

Green: 1955-1994 | 1987 | 2096 | 130.1 |

Blue: 1967-2006 | 3274 | 2574 | 164.0 |

The chart below depicts the case where Z = 0.75

Starting Withdrawals for the Total Return cases is $23.9K, Ending Shares is 13.7%.

Z = 0.75 | End Portfolio Value, K$ | Total Withdrawn, K$ | End Withdrawal Value, K$ |

Red: 1942-1981 | 433 | 2630 | 74.2 |

Green: 1955-1994 | 521 | 1818 | 78.7 |

Blue: 1967-2006 | 858 | 2363 | 107.5 |

For the case where Z = 1.0

Initial Withdrawal Values are $26.6, Ending Shares are 6.9%.

Z = 1.0 | End Portfolio Value, K$ | Total Withdrawn, K$ | End Withdrawal Value, K$ |

Red: 1942-1981 | 216 | 2460 | 48.9 |

Green: 1955-1994 | 261 | 1626 | 52.0 |

Blue: 1967-2006 | 429 | 2061 | 72.1 |

The chart below (Red curve) averages the Total Returns for the three 40 year time periods for the Z = 1.0 case, end withdrawal is $57.6K. Green curve is the dividend only, no shares sold, case.

This chart shows that, on average, significant Total Returns are possible IF one is careful.

Conclusions

It is not my intent to lure anyone into actions they are not comfortable with. I was curious about this subject and did the math, putting some meat on the jawbone of this debate. The results speak for themselves. It is obvious that selling shares in bear markets is not a good idea. On the other hand, if one sold shares modestly in bull markets and stashed some of that in a bond ETF or low beta equity to have funds available in bear markets, a greater total return might be had. Taking capital gains is particularly valid for those who wish to consume most of the portfolio. Adapting a tactic like selling bonds or low beta stocks during periods of low market prices and selling overvalued, low combination yield/dividend growth equities at high markets might also fit the bill.

These simulations assume a neat, regular dividend flow, which may not be realizable. What could be done to smooth out dividend withdrawals is to build a portfolio that yields 4.5%, use the 4% as income as shown above. Take the remaining 0.5% ($2K/year for starters, in this case) and invest in a 10 Treasury ETF. One is available at my Internet Brokerage account commission-free. If that principal is accumulated for, say, 5 years, then $10K is available to augment dividend flow. At the time of sale, during the depths of the bear market, interest rates are low, prices are high.

Care must be given regarding how these data are interpreted. With large amounts of dividend growth, particularly of the exponential type, maintained throughout the retirement time period, taking realized capital gains is problematical. However, at lower levels as shown here, such harvesting is something to be considered.

In any event, I like the withdrawal scheme, but you have to sell shares to take advantage.

**Disclosure: **I am long ACN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.