dbr wrote:PowerBuilder3 wrote:

"The fund that did pay dividends has lower prices by that 8% versus the other fund." Yes, The "No Dividend Fund starts at 50 and ends at 63", but Dividend Fund starts at 50 and end at 50. So that is factored in. BUT if withdrawing during a bear->bull cycle (for both) you had to sell more shares. I ran many Excel spreadsheets of this, and in Bear->Bull dividend always wins, assuming the same Total Return, pulling cash out, and dividends falling LESS than share prices. All the books say that starting retirement with a Bear market is the worse case - even if in the long run you get average growth.

If the return year by year is the same and the amount withdrawn year by year is the same, then it is a mathematical necessity that the two investments starting at the same value end at the same value. Otherwise either the returns are not the same or the withdrawals were not the same.

Somehow whatever was calculated did not keep return and withdrawal the same or there is a mathematical error.

The comment about sequence of returns is true but is not affected by whether withdrawals are taken by selling shares or cashing dividends unless one somehow engineers different returns or different amounts of withdrawal between the two cases.

I'm probably not using the correct terms, as Total Return always assumes the re-investment of dividends at the share price of the Stock (or Fund) at the moment the dividends were paid, and with my example that does not happen.

BUT If I don't care about the official Total Return, but my personal Total Return while I pull money from a fund, I think I limit my downside risk if I bias toward more dividends rather than less dividends, even if the "total return" nearly the same?

Here is a simplified example.

Both funds: Year 0 $50 per share, $10,000 total investment to start, hold for 2 years, returns 2% per year compounded.

No-Dividend Fund: Say ending price is $52.02 (50*(1.02)^2), no dividends, which would be 2% per year compounded.

Dividend Fund: Ending price is $50.00 but it paid 2 2% dividends of $200 each.

OK now I have to pull $200 a year out of the fund. And there is a horrible crash then full recovery, but its so fast the company (or fund) didn't change its dividend because neither its fundamentals or cash flow changed - say there was a crazy rumor that the CEO went insane so the multiple dropped, then they found out it was a hoax.

NoDividend:

Year 0 $10,000 $50 per share = 200 shares

Year 1 Price crashes to $5.00 per share! But I need $200 so I sell 40 shares,

So I now have 160 shares

Year 2 Whew! Price recovers to $52.02 So I only need to sell 3.84 shares!

So now I have 156.15 shares x $52.02 = 8,123.20 (plus my $400 in cash).

Dividend:

Year 0 $10,000 $50 per share = 200 shares

Year 1 Price crashes to $5.00 per share! But I still get my $200 cash, and sell nothing.

Year 2 Whew! Price recovers to $50 And I get my $200 cash.

So now I have 200 shares x $50.00 = 10,000 (plus my $400 in cash).

Obviously if the reverse happened, and the multiple went to the moon in Year 1, then I would have to sell almost no shares, and I would be better off with my 52.02 shares than my 50.00 shares.

So ON AVERAGE it doesn't make a difference, also I can't say its 'better' to own the Dividend vs NoDividend, but I still think in short bear markets the dividend payer earns bonus, therefore reduces downside risk.

I'm guessing that's one reason why dividend stocks have a premium, all other things being equal?