“Classical models of finance and consumption-saving decisions predict that [a] dividend will have little effect on…consumption... Under the assumptions of Merton Miller and Franco Modigliani, for example, investors can always reinvest unwanted dividends, or sell shares to create homemade dividends, and thereby insulate their preferred consumption stream from corporate dividend policies. Thus, in traditional models, the division of stock returns into dividends and capital gains is a financial decision of the firm that has no “real” consequence for investor consumption patterns.” Baker 2007 [who then goes on to critique the proposition]
We use the term fecundity here to refer to a portfolio's long-term ability to generate spendable cash for its owner, because fecund means "fruitful or fertile," and cash withdrawals from a portfolio are effectively its fruit… This paper will demonstrate that the fecundity of an equity portfolio — before expenses and (if applicable) taxes — lies somewhere between the earnings yield and the dividend yield of the portfolio.” Garland 2004 [1]
Dividends and Retirement – Some First Pass Thoughts
I’ve been retired for 13 years now and I have always had an unexamined – and according to others an unreasonable and un-theoried -- love for my dividend income stream (my made-up term for this is divophilia). It just feels like it is a good thing. I have rationalized myself into believing that goodness even though I am fairly conversant with financial theory and retirement finance…enough so to be quite skeptical of my own flawed inclinations and behaviors, a skepticism which might be warranted in this case. TBD