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.
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 | $ / share | market value | # shares sold | $ received | # shares owned |
| Jan 1 year 1 | 5000.0000 | $100.00 | $500,000.00 | 200.0000 | $20,000.00 | 4800.0000 |
| Jan 1 year 2 | 4800.0000 | $108.00 | $518,400.00 | 192.0000 | $20,736.00 | 4608.0000 |
| Jan 1 year 3 | 4608.0000 | $116.64 | $537,477.12 | 184.3200 | $21,499.08 | 4423.6800 |
| Jan 1 year 4 | 4423.6800 | $125.97 | $557,256.28 | 176.9472 | $22,290.25 | 4246.7328 |
| Jan 1 year 5 | 4246.7328 | $136.05 | $577,763.31 | 169.8693 | $23,110.53 | 4076.8635 |
| Jan 1 year 6 | 4076.8635 | $146.93 | $599,025.00 | 163.0745 | $23,961.00 | 3913.7889 |
| Jan 1 year 7 | 3913.7889 | $158.69 | $621,069.12 | 156.5516 | $24,842.76 | 3757.2374 |
| Jan 1 year 8 | 3757.2374 | $171.38 | $643,924.46 | 150.2895 | $25,756.98 | 3606.9479 |
| Jan 1 year 9 | 3606.9479 | $185.09 | $667,620.88 | 144.2779 | $26,704.84 | 3462.6700 |
| Jan 1 year 10 | 3462.6700 | $199.90 | $692,189.33 | 138.5068 | $27,687.57 | 3324.1632 |
| Jan 1 year 11 | 3324.1632 | $215.89 | $717,661.90 | 132.9665 | $28,706.48 | 3191.1967 |
| Jan 1 year 12 | 3191.1967 | $233.16 | $744,071.86 | 127.6479 | $29,762.87 | 3063.5488 |
| Jan 1 year 13 | 3063.5488 | $251.82 | $771,453.70 | 122.5420 | $30,858.15 | 2941.0068 |
| Jan 1 year 14 | 2941.0068 | $271.96 | $799,843.20 | 117.6403 | $31,993.73 | 2823.3666 |
| Jan 1 year 15 | 2823.3666 | $293.72 | $829,277.43 | 112.9347 | $33,171.10 | 2710.4319 |
| Jan 1 year 16 | 2710.4319 | $317.22 | $859,794.84 | 108.4173 | $34,391.79 | 2602.0146 |
| Jan 1 year 17 | 2602.0146 | $342.59 | $891,435.29 | 104.0806 | $35,657.41 | 2497.9340 |
| Jan 1 year 18 | 2497.9340 | $370.00 | $924,240.10 | 99.9174 | $36,969.60 | 2398.0167 |
| Jan 1 year 19 | 2398.0167 | $399.60 | $958,252.14 | 95.9207 | $38,330.09 | 2302.0960 |
| Jan 1 year 20 | 2302.0960 | $431.57 | $993,515.82 | 92.0838 | $39,740.63 | 2210.0122 |
| Jan 1 year 21 | 2210.0122 | $466.10 | $1,030,077.20 | 88.4005 | $41,203.09 | 2121.6117 |
| Jan 1 year 22 | 2121.6117 | $503.38 | $1,067,984.04 | 84.8645 | $42,719.36 | 2036.7472 |
| Jan 1 year 23 | 2036.7472 | $543.65 | $1,107,285.85 | 81.4699 | $44,291.43 | 1955.2773 |
| Jan 1 year 24 | 1955.2773 | $587.15 | $1,148,033.97 | 78.2111 | $45,921.36 | 1877.0662 |
| Jan 1 year 25 | 1877.0662 | $634.12 | $1,190,281.62 | 75.0826 | $47,611.26 | 1801.9836 |
| Jan 1 year 26 | 1801.9836 | $684.85 | $1,234,083.99 | 72.0793 | $49,363.36 | 1729.9042 |
| Jan 1 year 27 | 1729.9042 | $739.64 | $1,279,498.28 | 69.1962 | $51,179.93 | 1660.7081 |
| Jan 1 year 28 | 1660.7081 | $798.81 | $1,326,583.82 | 66.4283 | $53,063.35 | 1594.2797 |
| Jan 1 year 29 | 1594.2797 | $862.71 | $1,375,402.10 | 63.7712 | $55,016.08 | 1530.5086 |
| Jan 1 year 30 | 1530.5086 | $931.73 | $1,426,016.90 | 61.2203 | $57,040.68 | 1469.2882 |
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 | $ / share | market value | # shares sold | $ received | # shares owned | s&p 500 | % change | inflation |
| Jan 1 1983 | 5000.0000 | $100.00 | $500,000.00 | 200.0000 | $20,000.00 | 4800.0000 | $138.34 | ||
| Jan 1 1984 | 4800.0000 | $118.58 | $569,171.61 | 192.0000 | $22,766.86 | 4608.0000 | $164.04 | 18.58 | 3.22 |
| Jan 1 1985 | 4608.0000 | $119.54 | $550,834.87 | 184.3200 | $22,033.39 | 4423.6800 | $165.37 | 0.81 | 4.30 |
| Jan 1 1986 | 4423.6800 | $151.50 | $670,203.19 | 176.9472 | $26,808.13 | 4246.7328 | $209.59 | 26.74 | 3.55 |
| Jan 1 1987 | 4246.7328 | $178.15 | $756,547.13 | 169.8693 | $30,261.89 | 4076.8635 | $246.45 | 17.59 | 1.91 |
| Jan 1 1988 | 4076.8635 | $185.01 | $754,252.16 | 163.0745 | $30,170.09 | 3913.7889 | $255.94 | 3.85 | 3.66 |
| Jan 1 1989 | 3913.7889 | $199.01 | $778,881.91 | 156.5516 | $31,155.28 | 3757.2374 | $275.31 | 7.57 | 4.08 |
| Jan 1 1990 | 3757.2374 | $260.00 | $976,898.02 | 150.2895 | $39,075.92 | 3606.9479 | $359.69 | 30.65 | 4.83 |
| Jan 1 1991 | 3606.9479 | $235.98 | $851,155.23 | 144.2779 | $34,046.21 | 3462.6700 | $326.45 | (9.24) | 5.39 |
| Jan 1 1992 | 3462.6700 | $301.62 | $1,044,407.75 | 138.5068 | $41,776.31 | 3324.1632 | $417.26 | 27.82 | 4.25 |
| Jan 1 1993 | 3324.1632 | $314.72 | $1,046,171.87 | 132.9665 | $41,846.87 | 3191.1967 | $435.38 | 4.34 | 3.03 |
| Jan 1 1994 | 3191.1967 | $336.45 | $1,073,666.74 | 127.6479 | $42,946.67 | 3063.5488 | $465.44 | 6.90 | 2.96 |
| Jan 1 1995 | 3063.5488 | $331.87 | $1,016,702.24 | 122.5420 | $40,668.09 | 2941.0068 | $459.11 | (1.36) | 2.61 |
| Jan 1 1996 | 2941.0068 | $448.70 | $1,319,626.41 | 117.6403 | $52,785.06 | 2823.3666 | $620.73 | 35.20 | 2.81 |
| Jan 1 1997 | 2823.3666 | $532.75 | $1,504,155.99 | 112.9347 | $60,166.24 | 2710.4319 | $737.01 | 18.73 | 2.93 |
| Jan 1 1998 | 2710.4319 | $704.81 | $1,910,350.96 | 108.4173 | $76,414.04 | 2602.0146 | $975.04 | 32.30 | 2.34 |
| Jan 1 1999 | 2602.0146 | $887.74 | $2,309,913.37 | 104.0806 | $92,396.53 | 2497.9340 | $1,228.10 | 25.95 | 1.55 |
| Jan 1 2000 | 2497.9340 | $1,051.92 | $2,627,615.71 | 99.9174 | $105,104.63 | 2398.0167 | $1,455.22 | 18.49 | 2.19 |
| Jan 1 2001 | 2398.0167 | $927.62 | $2,224,449.08 | 95.9207 | $88,977.96 | 2302.0960 | $1,283.27 | (11.82) | 3.38 |
| Jan 1 2002 | 2302.0960 | $834.66 | $1,921,469.71 | 92.0838 | $76,858.79 | 2210.0122 | $1,154.67 | (10.02) | 2.83 |
| Jan 1 2003 | 2210.0122 | $657.10 | $1,452,195.58 | 88.4005 | $58,087.82 | 2121.6117 | $909.03 | (21.27) | 1.59 |
| Jan 1 2004 | 2121.6117 | $801.27 | $1,699,988.52 | 84.8645 | $67,999.54 | 2036.7472 | $1,108.48 | 21.94 | 2.27 |
| Jan 1 2005 | 2036.7472 | $868.93 | $1,769,794.05 | 81.4699 | $70,791.76 | 1955.2773 | $1,202.08 | 8.44 | 2.68 |
| Jan 1 2006 | 1955.2773 | $917.16 | $1,793,303.36 | 78.2111 | $71,732.13 | 1877.0662 | $1,268.80 | 5.55 | 3.39 |
| Jan 1 2007 | 1877.0662 | $1,024.00 | $1,922,113.65 | 75.0826 | $76,884.55 | 1801.9836 | $1,416.60 | 11.65 | 3.24 |
| Jan 1 2008 | 1801.9836 | $1,046.09 | $1,885,035.83 | 72.0793 | $75,401.43 | 1729.9042 | $1,447.16 | 2.16 | 2.85 |
| Jan 1 2009 | 1729.9042 | $673.56 | $1,165,190.67 | 69.1962 | $46,607.63 | 1660.7081 | $931.80 | (35.61) | 3.85 |
| Jan 1 2010 | 1660.7081 | $818.99 | $1,360,102.38 | 66.4283 | $54,404.10 | 1594.2797 | $1,132.99 | 21.59 | -0.34 |
| Jan 1 2011 | 1594.2797 | $919.38 | $1,465,748.58 | 63.7712 | $58,629.94 | 1530.5086 | $1,271.87 | 12.26 | 1.64 |
| Jan 1 2012 | 1530.5086 | $923.13 | $1,412,860.53 | 61.2203 | $56,514.42 | 1469.2882 | $1,277.06 | 0.41 | 3.16 |
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:
- http://seekingalpha.com/article/282151-retirement-s-4-rule-surprising-answers-you-need-to-know-about-the-inflation-factor
- http://seekingalpha.com/article/284494-retirement-s-4-rule-the-importance-of-return-sequence
- http://seekingalpha.com/article/290289-retirement-s-4-rule-why-mr-mrs-income-don-t-need-it-part-1
- http://seekingalpha.com/article/290294-retirement-s-4-rule-why-mr-mrs-income-don-t-need-it-part-2
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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
