tjh290633 wrote:hiriskpaul wrote:Ok, I accept I may have jumped the gun in this thread. Let's see if someone does try to make the case that the dividend route is financially superior to selling accumulation shares.
One thing that occurs to me is that selling shares incurs a cost, while receiving dividends is essentially cost free. Not only is there brokerage to pay, there is also the spread between buying and selling shares. If you pay £10 to sell a block of shares, then if you want £1,000 that is a 1% deduction. If you want to do it in bigger chunks, then eventually you run into the PTM levy which is a minor increase. If your broker charges a percentage fee, then the cost will be higher as the amount increases.
Yes, I agree that selling investments does come at a cost and said so previously. I hold some securities that at times have spreads in excess of 2% and cannot be traded online, so requiring higher telephone dealer commissions. Trading frictions can definitely be painful. However, the OP is comparing taking dividends with selling index funds and the trading costs on index funds is usually very small. The spread can even be zero, depending on the cashflows in and out of the fund on the day.
The selling route also runs the inherent risk in market fluctuation. You may sell more of the Goose that lays your Golden Dividends than you wanted to.
True, the selling route does run the risk of market fluctuation, but so does taking dividends.
For example, consider a share that does not pay dividends, such as Berkshire Hathaway or an accumulating fund of some sort. Start off with £100k of shares, market drops 50%, so now only £50k. £2k of shares is sold for income, leaving £48k of shares. The market subsequently reverts and the shares double in price, so the remaining shares are now worth £96k. By selling £2k worth of shares at the bottom, the investor is £4k worse off than if they had not sold. That's volatility risk and it can be detrimental to long term returns.
What about the dividend case? Start off with £100k of shares, market drops 50%, so now only £50k. The shares pay out £2k of dividends and consequently the value of the shares drops to £48k. As before, the market subsequently reverts and the shares double in price, so the shares are now worth £96k. So, taking £2k of dividends when the market was down leaves the investor £4k worse off than would have been the case if the investor had reinvested. ie all else being equal, the investor experiences exactly the same volatility risk with dividend paying shares as with non-dividend paying shares. Volatility risk cannot be avoided by loading up on dividend paying shares.