GoneOnTilt wrote: ↑Thu Oct 14, 2021 10:47 am
burritoLover wrote: ↑Thu Oct 14, 2021 10:26 am
I've never seen any of the "dividends are not spending down the principal" investors on this forum change their position to agree that a dividend is the equivalent to selling shares.
I've never seen any of the "dividends are not spending down the principal" investors on this forum at all.
Can you provide specific threads, quotes and references from the forum where people claim that "dividends are not spending down the principal"?
Dividends are part of the total return. Some people prefer them. John Bogle preferred them for his charity (he used the Vanguard High Dividend Yield Fund for the dividends).
Here is a list of searches of the forum on the term "spending down the principal." Probably many of the posts correct the idea that there is something good about not spending down the principal, but here is the list: https://www.google.com/search?sitesearc ... +principal
Of course it is just a matter of definitions. If "principal" is defined as the original holding in shares, and you never sell anything while taking and spending the dividends, then indeed one is not "spending down" the principal. The idea places great importance on still having the shares but ignores what the value of a share has become. But the real point in people lecturing about doing the accounting using the notion of total return is that the idea of "principal" measured in number of original shares goes away. There is only an initial investment in dollars and then returns, contributions, and withdrawals. A part of the definition is that taking a dividend is a withdrawal. The value of total return account is that it is a necessary, a sufficient, and a simple way to understand what is happening to one's investment. It is also the conventional set of definitions used in the investment industry whether in the form of CAGR or when there are contributions and withdrawals expressed as personal return, technically IRR or time weighted return. Because return is defined in total return accounting as market value changes and dividends the assumption in the math is that dividends are reinvested and buy more shares. That means that spending the dividend is to "not buy" more shares, or, in effect, to have sold the shares "not bought."
I suspect that part of the issue is historic going back to the default that owners of stock are sent dividend checks and owners of bond clip of actual coupons with scissors and take them to the bank. Trying to get periodic payments by selling shares was awkward and expensive and really a big deal in terms of cutting down the investment position in the obligatory lot of 100 shares. Bonds in turn would be held to maturity and redeemed. Back in the days in England the upper class family might own an estate which was entailed and could not be sold. In that case the value of the estate for consumption lies in the income from rents, farming, etc. and a person's wealth can be meaningfully expressed by stating his income.
I am not sure why or for what reason people sometimes talk about the benefit or the security of not spending the principal. For anyone starting out today from scratch to study investing the set of definitions and arithmetic of total return are the default and the source for the idea of not spend the principal becomes a little mysterious. That is one reason one finds the quote from Mr. Bogle that starts this thread to be odd, along with the reference to going to the mailbox to pick up checks. For a few years of my life I lived on 140 acres in the country and we did in fact walk out to the mailbox to get the mail. Most of my life, though, the mail comes through a slot into the house. Even the "walk out" part seems odd to me. It is a kind of "back in the day" think and yet Mr. Bogle himself is one of the great innovators of the financial system we individual investors use today. I think sometimes Mr. Buffett, the other great hero of investing is a little bit the same with his "old fashioned" virtues and the mystique of the Midwest about him. But no one should be deceived about either of those gentlemen. It is still true that both are known for some odd snippets of interview that cause much consternation here on this forum.
Also, I am old enough these comments here are not coming from some young "whippersnapper." I am one who has gotten dividend checks in the mail and kept a bundle of 100 share certificates in a safe-deposit box and signed the back in ink and took them by hand to a broker to sell shares. I never clipped coupons though. I think I'm going to get a little soda-bicarb to settle the stomach now.