No. of Recommendations: 5
with dividend, one can hold the same numbers of share forever; with selling a small number of shares equal to 2% of dividend for example, the shares would eventually run out. How to explain this difference?
Price
...plus the assumption that the stock in question will steadily grow over rolling 5-10 year periods.
(For the sake of simplicity, assume all of the following numbers are after tax and after inflation)
Let's say you have an income need of $10,000/year from the sale of 2% of your shares in year one, for a hypothetical stock that is selling at $100/share (i.e. you start out owning 5,000 shares, priced at $500,000)
The stock price grows, on average, 5%/year
So on Day One, you sell 100 shares @ $100, leaving you with 4900 shares.
One year later, you have 4900 shares, but the stock price is up 5% to $105, so the investment is worth $514,500.
You need $10,000. So you sell 95 shares, not 100. And, assuming the parameters hold (i.e. constant average rolling price growth), you never run out.
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A modification of this is to say: I'll sell 2% of my currently owned shares each year.
So, year one you sell 100 shares of your 5,000.
Year two you sell 2% of your remaining 4,900 shares, or 98 shares. This nets you 98 * $105/share = $10,290
Year three you have 4,802 shares, now worth $110.25.
Selling two percent of that yields ~$10,600, and leaves you ~4,706 shares.
And, you never run out
--sutton
