No. of Recommendations: 4
Just a theoretical question: 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?
The shares would NOT run out, and financially it is almost the exact equivalent. Here's the numbers -
Let's say you own 10,000 shares of company A. And those shares are worth $100 each, and the company grows at 9%. If you want a 2% yield in cash from this investment, in the first year, you sell 200 shares for $20,000, or a 2% yield on that investment. In the second year, you sell 196 shares for $21,364, or a 2% yield on that investment. After 9% growth, that investment is now worth $1,068,200. In the 25th year, you will sell 123 shares for $97,430, or a 2% yield. And after 9% growth, that investment will be worth about $4.8M. In the 50th year, you will sell 74 shares for $507k. And at the end of that 50th year, the investment is worth about $25M.
Let's say you own 10,000 shares of company B. And those shares are worth $100 each, and the company grows at 9%. AND the company distributes a 2% dividend each year. In the first year, you will receive a 2% dividend of $20,000, and the value of the company will grow at 9% minus the 2% that it distributed. Same for the second year. Same for the 50th year. At the end of the 50th year, you will still receive that 2% yield, and you will have 10,000 shares, and the investment will similarly be worth about $25M.
