I will still take the dividends

An e-mail I received from Retirement Researchers by Wade Pfau contains this:

“If a retiree owns 1,000 shares before receiving a dividend and still owns 1,000 shares afterward, it can seem as though nothing has been spent. Selling 20 shares feels different because the account now holds fewer shares. That visual difference can reinforce the idea that dividends allow you to spend income while preserving principal.

For example, suppose a company is trading at $100 per share, and an investor owns 100 shares worth $10,000. If the company pays a $4 dividend, the investor receives $400 in cash. Ignoring normal market movements, the stock’s value adjusts downward to reflect the cash that left the company, leaving the investor with about $9,600 in stock and $400 in cash. The investor has not gained an additional $400 of wealth. Some of the value that had been held inside the company has simply been distributed in cash.”

I see it differently (are you surprised?)

The “ignoring normal market movements” make no sense to me. Market movements could cause the stock to rise immediately after a dividend. If I still hold the same number of shares, I benefit more than if I sold shares equivalent to the dividend income. The combined dollar value of the stock and dividend may be equal, but selling shares lowers potential future growth to my way of think.

Wade goes on to say, “The same basic economics apply if the company does not pay a dividend. If the investment is still worth $10,000, the investor could sell $400 of it to raise the same amount of cash. One approach leaves the investor with the same number of shares at a lower value. The other leaves the investor with fewer shares at the same price. In both cases, a portion of the investment has been converted into spendable cash.”

“The same number of shares” is the key in my book. Why would I want fewer shares? In retirement I want to generate income and preserve capital (shares in this case) as much as possible to aid in future income generation.

Wade also makes the point it is not a good idea to only rely on dividend income in retirement. That makes sense, but dividends can be a way to deal with inflation as well if they are in addition to basic income. For decades I reinvested dividends in two companies. In recent years I changed that to cash payments placed in a money market account. My number of shares stopped growing, but now I have a larger cash reserve that also grows with interest, but without decline risk.

In the last year the price of those two stocks have seen an all time and now dropped $16 a share (market movements) but I still have all the shares generating dividends with the possibility of regaining the $16 and more - if you can believe analyst’s price targets. It is what it is and is what it isn’t.

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