Gengulphus wrote:Arborbridge wrote:
Well, that's an old argument [no difference between income and growth]. Technically true, but some people - I am one - prefer an income via dividends than via capital harvesting. So there is a difference between income and capital - it's mainly a practical difference. A matter of convenience, if you like.
Indeed. Two important practical differences as far as I'm concerned are to the decision-making and to how urgent it can be.
Interesting discussion, and whilst there were frequent thread on TMF around this subject, I don't recall many detailed ones here yet.
Some further considerations for me personally -
1. I very much prefer not to want to 'switch strategies' between growing a portfolio and finally taking income from it, I think managing that preference by using a dividend-income approach gives me a number of benefits -
(a) - I only have to learn, and learn how to manage and cope with, a single strategy. Whilst this may not be a huge consideration for others, it's very important to me...
(b) - Whilst the
decision-making around taking income (selling some shares..) from a growth strategy when actually *in* the income-taking phase has been discussed, I think it's also important to appreciate that for anyone wanting to maintain a semblance of 'balanced-portfolio-weighting' during the
building phase, they might well
also need to be making these sorts of selling decisions throughout the entire lifetime of a portfolio, even from potentially very early stages.
This compounds your valid concerns regarding decision-making during the phase of taking income itself, and is reduced somewhat with a dividend-income strategy by the regularity of 'not-needed' income generated from dividends received
throughout the building phase, as the balancing process can then generally be maintained purely by using the regular
buying opportunities that this dividend-income gives us during that stage.
(c) - It enables me to use the 'dividend-switch' approach, where an income-strategy based more or less entirely on a dividend-approach has no need to change at all between the
portfolio-growing phase and the
income-taking phase, with a single '
switch-throw' being the only necessary change needing to be carried out, where the holder diverts dividends from what used to be the '
back into the portfolio' position onto the '
pay it into my bank account' position.
2. Selling shares to generate income costs money in the form of broker-charges. Dividends will generally flow into an account with no further charges at all following the initial purchase of the paying-entities.
A counter to this extra cost-charge might be that it may be seen to be insignificant in terms of the capital amounts being talked about when in the income-taking stage, but that will depend on the level of capital being removed using a growth strategy, and the regularity of such sales, and this in itself raises other growth-strategy-related issues -
(a) - If someone wanted to take a years-worth of income from a growth-portfolio at the beginning of the year, then what might be a substantial amount of money is then removed from the market, reducing the effectiveness of portfolio-capital appreciation on that amount. An element of market-timing-effect might also come into play at this point, with large sales having to take place at what might be a relative-market-low at those times...
(b) - If someone were to take
smaller amounts over more regular periods, then this approach would then clearly become more affected by broker-charges, and depending on the levels of sales being made, these charges then may become relatively significant compared to the removed capital. This approach might help remove some market-timing element from the single-shot approach above, but would become more expensive at the same time, again incurring costs that aren't encountered when receiving dividends.
Taking someone who may want to receive £1000 per month from their growth-portfolio, then making the sales once per month might incur a £20 broker-charge, for instance. This might seem insignificant to some, but as a frequent 2% charge every month on their income, it's not insignificant when compared to the free-delivery of £1000 of dividends using a dividend-income strategy....
Just some further thoughts that have occurred over the years.
Cheers,
Itsallaguess