In the spirit of My Own Advisor’s post The Top 5 Things You Need to Know about Dividend Paying Stocks, I decided to sing the merits of selling 5% of your stocks each year. I don't want to pick on My Own Advisor because he's a good guy and many blogs say similar things, but I had to pick some blog to have some fun with.
1. Selling 5% of your stocks each year provides an immediate return.
Even if your stocks subsequently go down in value, you get to keep the cash from selling 5% of your stocks each year.
2. Safety buffer against the worst case scenario.
If the worst happens and the businesses you own go bankrupt, you get to keep the cash from 5% sales in all previous years.
3. The value of that 5% increases over time.
As long as your business is successful and produces more than a 5% yearly increase in share value, each year’s sale will be worth more than it was the previous year.
4. Many businesses have a long history of rising share values.
Several Canadian banks along with BCE have been around since the nineteenth century, and their share values have risen impressively.
I won’t torture you with an attempt to match the fifth point. The main idea is that if a business doesn’t give some of its cash back to shareholders in the form of a dividend, you can always just sell some of the stock. Only a fraction of the sale will be taxable as a capital gain, making this approach more tax-efficient than dividends. I’m not saying that dividend investing is necessarily bad, but many of the trumpeted benefits exist more in our minds than in reality.