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In the article The Misplaced Mania Over Dividend-Paying Stocks by Arnold Landy, commenter "varan" asked:

"1. Stock A grows with a CAGR of 8% (obviously the yearly return fluctuates) over a 30 year period with no dividend. The owner of the stock takes out 4% every year, irrespective of what a particular year's return is. The number of shares that he owns is high enough so that the transaction cost in selling 4% every year is minimal.

2. Stock B grows with a CAGR of 4% (obviously the yearly return fluctuates) over a 30 year period and the dividend is 4% which the owner has as income.
Question: What is the difference between the two scenarios for the investor?"

varan is asking if "I'll just sell a few shares when I need cash" is the same as receiving a dividend.

Is it?

Let's ignore the effects of taxes, the time value of money, brokerage costs, etc. as they will not affect the conclusion. Let's pretend we live in a magical world where stocks go up by 8% every year.

Suppose you own 5,000 shares of stock A. The share price is currently $100. At the beginning of each year, you sell 4% of the market value of your shares. The following chart shows what happens over 30 years:

date# shares owned$ / sharemarket value# shares sold$ received# shares owned
Jan 1 year 15000.0000$100.00$500,000.00200.0000$20,000.004800.0000
Jan 1 year 24800.0000$108.00$518,400.00192.0000$20,736.004608.0000
Jan 1 year 34608.0000$116.64$537,477.12184.3200$21,499.084423.6800
Jan 1 year 44423.6800$125.97$557,256.28176.9472$22,290.254246.7328
Jan 1 year 54246.7328$136.05$577,763.31169.8693$23,110.534076.8635
Jan 1 year 64076.8635$146.93$599,025.00163.0745$23,961.003913.7889
Jan 1 year 73913.7889$158.69$621,069.12156.5516$24,842.763757.2374
Jan 1 year 83757.2374$171.38$643,924.46150.2895$25,756.983606.9479
Jan 1 year 93606.9479$185.09$667,620.88144.2779$26,704.843462.6700
Jan 1 year 103462.6700$199.90$692,189.33138.5068$27,687.573324.1632
Jan 1 year 113324.1632$215.89$717,661.90132.9665$28,706.483191.1967
Jan 1 year 123191.1967$233.16$744,071.86127.6479$29,762.873063.5488
Jan 1 year 133063.5488$251.82$771,453.70122.5420$30,858.152941.0068
Jan 1 year 142941.0068$271.96$799,843.20117.6403$31,993.732823.3666
Jan 1 year 152823.3666$293.72$829,277.43112.9347$33,171.102710.4319
Jan 1 year 162710.4319$317.22$859,794.84108.4173$34,391.792602.0146
Jan 1 year 172602.0146$342.59$891,435.29104.0806$35,657.412497.9340
Jan 1 year 182497.9340$370.00$924,240.1099.9174$36,969.602398.0167
Jan 1 year 192398.0167$399.60$958,252.1495.9207$38,330.092302.0960
Jan 1 year 202302.0960$431.57$993,515.8292.0838$39,740.632210.0122
Jan 1 year 212210.0122$466.10$1,030,077.2088.4005$41,203.092121.6117
Jan 1 year 222121.6117$503.38$1,067,984.0484.8645$42,719.362036.7472
Jan 1 year 232036.7472$543.65$1,107,285.8581.4699$44,291.431955.2773
Jan 1 year 241955.2773$587.15$1,148,033.9778.2111$45,921.361877.0662
Jan 1 year 251877.0662$634.12$1,190,281.6275.0826$47,611.261801.9836
Jan 1 year 261801.9836$684.85$1,234,083.9972.0793$49,363.361729.9042
Jan 1 year 271729.9042$739.64$1,279,498.2869.1962$51,179.931660.7081
Jan 1 year 281660.7081$798.81$1,326,583.8266.4283$53,063.351594.2797
Jan 1 year 291594.2797$862.71$1,375,402.1063.7712$55,016.081530.5086
Jan 1 year 301530.5086$931.73$1,426,016.9061.2203$57,040.681469.2882

It certainly appears as though "I'll just sell a few shares when I need cash" works, i.e. provides a stream of income that rises enough to counteract inflation.

Let's return to the real world, where stocks do not go up by 8% every year.

Suppose you own 5,000 shares of stock A. The share price is currently $100. At the beginning of each year, you sell 4% of the market value of your shares. Suppose the share price goes up and down by the same percentage as the S&P 500 [historical prices from Yahoo! Finance, symbol "S&P 500 (^GSPC) - SNP"]. Suppose we begin on January 1, 1983. The following chart shows what happens over 30 years:

date# shares owned$ / sharemarket value# shares sold$ received# shares owneds&p 500% changeinflation
Jan 1 19835000.0000$100.00$500,000.00200.0000$20,000.004800.0000$138.34
Jan 1 19844800.0000$118.58$569,171.61192.0000$22,766.864608.0000$164.0418.583.22
Jan 1 19854608.0000$119.54$550,834.87184.3200$22,033.394423.6800$165.370.814.30
Jan 1 19864423.6800$151.50$670,203.19176.9472$26,808.134246.7328$209.5926.743.55
Jan 1 19874246.7328$178.15$756,547.13169.8693$30,261.894076.8635$246.4517.591.91
Jan 1 19884076.8635$185.01$754,252.16163.0745$30,170.093913.7889$255.943.853.66
Jan 1 19893913.7889$199.01$778,881.91156.5516$31,155.283757.2374$275.317.574.08
Jan 1 19903757.2374$260.00$976,898.02150.2895$39,075.923606.9479$359.6930.654.83
Jan 1 19913606.9479$235.98$851,155.23144.2779$34,046.213462.6700$326.45(9.24)5.39
Jan 1 19923462.6700$301.62$1,044,407.75138.5068$41,776.313324.1632$417.2627.824.25
Jan 1 19933324.1632$314.72$1,046,171.87132.9665$41,846.873191.1967$435.384.343.03
Jan 1 19943191.1967$336.45$1,073,666.74127.6479$42,946.673063.5488$465.446.902.96
Jan 1 19953063.5488$331.87$1,016,702.24122.5420$40,668.092941.0068$459.11(1.36)2.61
Jan 1 19962941.0068$448.70$1,319,626.41117.6403$52,785.062823.3666$620.7335.202.81
Jan 1 19972823.3666$532.75$1,504,155.99112.9347$60,166.242710.4319$737.0118.732.93
Jan 1 19982710.4319$704.81$1,910,350.96108.4173$76,414.042602.0146$975.0432.302.34
Jan 1 19992602.0146$887.74$2,309,913.37104.0806$92,396.532497.9340$1,228.1025.951.55
Jan 1 20002497.9340$1,051.92$2,627,615.7199.9174$105,104.632398.0167$1,455.2218.492.19
Jan 1 20012398.0167$927.62$2,224,449.0895.9207$88,977.962302.0960$1,283.27(11.82)3.38
Jan 1 20022302.0960$834.66$1,921,469.7192.0838$76,858.792210.0122$1,154.67(10.02)2.83
Jan 1 20032210.0122$657.10$1,452,195.5888.4005$58,087.822121.6117$909.03(21.27)1.59
Jan 1 20042121.6117$801.27$1,699,988.5284.8645$67,999.542036.7472$1,108.4821.942.27
Jan 1 20052036.7472$868.93$1,769,794.0581.4699$70,791.761955.2773$1,202.088.442.68
Jan 1 20061955.2773$917.16$1,793,303.3678.2111$71,732.131877.0662$1,268.805.553.39
Jan 1 20071877.0662$1,024.00$1,922,113.6575.0826$76,884.551801.9836$1,416.6011.653.24
Jan 1 20081801.9836$1,046.09$1,885,035.8372.0793$75,401.431729.9042$1,447.162.162.85
Jan 1 20091729.9042$673.56$1,165,190.6769.1962$46,607.631660.7081$931.80(35.61)3.85
Jan 1 20101660.7081$818.99$1,360,102.3866.4283$54,404.101594.2797$1,132.9921.59-0.34
Jan 1 20111594.2797$919.38$1,465,748.5863.7712$58,629.941530.5086$1,271.8712.261.64
Jan 1 20121530.5086$923.13$1,412,860.5361.2203$56,514.421469.2882$1,277.060.413.16

There were 3 years (1985, 2008, 2012) when your income went up (+0.81%, +2.16%, +0.41% respectively), but not by enough to overcome inflation [inflation figures taken from www.inflationdata.com/inflation/inflatio...].

There were 6 years (1991, 1995, 2001, 2002, 2003, 2009) when your income dropped (-9.24%, -1.36%, -11.82%, -10.02%, -21.27%, -35.61% respectively). Your income was lower in 2009 than it was in every year from 1996 onward.

You lost purchasing power and/or income in 9 out of 30 years.

If your goal is to provide a stream of income that rises enough to counteract inflation, then you did not achieve your goal.

You might think about (A) selling fewer shares when the share price is higher and selling more shares when the share price is lower, or (B) banking "excess" income in years when you have it, for years when you need it, but this is not enough - what if you retired on 1/1/2001 or 1/1/2009, and for your first year (or three) the share price declined?

Further Reading

Anyone considering selling assets to fund retirement should read the following articles by David Van Knapp:

Conclusion

Anyone planning for a reliable income stream during retirement, that grows faster than inflation, should avoid the "I'll Just Sell A Few Shares When I Need Cash" fallacy. It doesn't work.

Source: Why 'I'll Just Sell A Few Shares When I Need Cash' Doesn't Work