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Withdrawing dividends is a poor investment plan

Dividend is just a withdrawal, NOT new income

A menu into this page:

Withdrawing Dividends has a High Cost

How Stock and Fund dividends Work

How you CAN reinvest stock dividends

Calculator for Reinvested or Withdrawn Dividends

Hard Evidence Dividend Payment does cause investment price drop

If you might be one who imagines stock and fund dividends are a new free gift to be withdrawn, then you really should read the following explanation about how that is Not true, and how stock or fund dividend reinvestment is extremely important instead. This is about stock and fund dividends (but directly owned bond dividends instead pay interest.) See how you CAN reinvest stock dividends below.

Stock dividends are earned money you already owned in the stock value, but as distributed to you, it was subtracted from your stock value, becoming cash. It is called a dividend, but in fact is just a withdrawn distribution from your investment, reducing your investment amount. My goal is to make a believer of you about this, so you won't waste future earnings by withdrawing the dividend. There is a Calculator for Dividend Reinvestment or Withdrawal below.

You can instead put it back by reinvesting the dividend, which then maintains the same prior investment value (same value on that day), which also provides a few additional free shares every year, which is a mighty Big Deal to future earnings.

Reinvesting Stock or Fund dividends (and minimizing any withdrawals) are very healthy for a growing investment. A few decades of growth will be all-important to retirement (so start young to avoid missing out on the years of compounding). The detail is below, but stock dividends are costly withdrawals, because it leaves less money to grow. You can easily put it back though, and then gains on reinvested dividends are compounded and keeps earning more future gains, continually. Any frequent withdrawal (of stock dividends or otherwise) can very seriously reduce future compounded gain earnings.

First Things First: Cost of Withdrawals

It's important to realize that Withdrawing Dividends (WD) is at high cost, and no small matter. Not that the dividend is a choice, but the dividend payment is a withdrawal from your stock, reducing your investment, which if withdrawn can be costly, having a huge long term bad effect on the now smaller investment. However, you can instead simply put it back by reinvesting the dividend to retain the previous investment value, which has the added big benefit of providing a few free additional shares every quarter.

First, here's a chart calculating the actual cost of withdrawing dividends from a S&P 500 Index fund. It computes past S&P history of $25,000 invested for up to 50 of the past years. The S&P 500 dividend for the past 50 years has averaged around 2.8% a year, and is about 1.7% currently. That may sound small and insignificant, but it definitely is an advantage. Except withdrawing it becomes unimaginably costly over the years. This table does Not include 2023 (due to the Annualized Return numbers being inconsistent with partial years). The chart is copied from the S&P calculator page.

Withdrawing dividends (WD) is extremely costly to the long term fund income

S&P 500No withdrawalsOverall Cost of Withdrawing all Dividends
$25K
Start
YrsFund Value
No WD
Dividends
reinvestd
Fund Value
after WD
Dividend
Withdraw
End Value
Fund + WD
Cost of
Withdraws
20203$31,054$21,411$29,675$1,443$31,118$1,380
201013$109,154$35,193$85,633$13,242$98,875$23,520
200023$98,857$37,645$64,733$13,596$78,329$34,124
199033$516,895$123,957$268,049$66,304$334,353$248,846
198043$2,525,623$551,549$874,100$234,865$1,108,965$1,651,523
197053$4,437,301$967,101$1,020,786$285,137$1,305,923$3,416,515

Next is added columns continuing the table above (trying to keep screen width down). The Gain and Annualized columns are from the two yellow columns above.

S&P 500No withdrawalsDividend Withdrawals
$25K
Start
YrsGainAnnualized
Return
GainAnnualized
Return
Income
Change
2020324.2%7.50%18.7%5.88%0.20%
201013337%12.01%242%9.93%-9.42%
200023295%6.16%159%4.22%-20.77%
1990331968%9.61%972%7.45%-35.32%
19804310002%11.33%3396%8.62%-56.09%
19705317649%10.26%3983%7.25%-70.57%

Quarter after quarter, the withdrawn dividends reduced the fund value and then the funds gains, which then also reduce the dividends. 2022 was seriously bad, closed down -18%, so the +0.20% might be argued that withdrawing the dividends reduced that exposure of some of the money, but it's nothing compared to the overall result (and now those new shares are not there for the recovery).

The cost of withdrawals (WD) is the money "that could have been" minus the money remaining available.

WD Cost % =
(Final value w/No WD) - (WD + Final value after WD)
Final value with No WD
× 100

Long term, reinvesting dividends is a major part of the long term earnings.

That ought to get your attention. The cost numbers will of course vary with different stock choice, and different markets in different years, and different initial investment. But the concept is going to be the same, and if you're withdrawing dividends, I strongly suggest you rethink that. It may not be obvious how to reinvest stock dividends, but How is shown below.

The cost of Withdrawals (WD) is the money "that could have been" minus the money actually remaining available. Reinvesting stock and fund dividends adds free shares, withdrawing them does not.

WD Cost % =
(Final value w/No WD) - (WD + Remaining value)
Final value w/No WD
× 100

Don't miss the Calculator for Dividend Reinvestment or Withdrawal below for this.

It does seem obvious that the best retirement planning is to start a good investment as early as possible, and let it grow for as many years as possible, until the retirement time comes to start withdrawing it. The many years of compounding is the major part of the gains.

Directly owned Bond dividends are interest income, but this article is about stock and fund dividends, including bond funds. Directly held bonds are different than stocks or funds. Resell value of bonds are affected by current interest rate changes, increasing now for new bonds, however it lowers the value of existing bonds. But bonds that are purchased directly and held until maturity or until recalled are then redeemed at full face value, without value change. You should be very aware of the difference of important information about buying bonds directly vs. bond funds. Directly held US government bonds can be purchased directly from the US treasury, and possibly through your own broker. But bonds held in a bond fund are a fund, not directly held. Any bonds that are sold prior to redemption do vary in price due to interest rate changes (because if interest rates have increased, the buyer also has other better options then). Bond dividends in funds could be reinvested to provide compounding, but the value of bonds in a fund are priced according to current interest rates. But yes, directly held bond dividends are income, same as any interest, taxed as regular income tax rates (but stock and fund dividends are mostly taxed as capital gains after the first year).

But stock and fund dividends when paid do automatically equally reduce a stocks price value remaining (because the company's value decreases when they pay out dividends — more below). Withdrawing stock dividends are the same as any other withdrawal, simply lowering the overall value remaining. However, stock dividends can be reinvested to retain the same investment value, and then, the additional shares will increase compounding of future earnings, which then becomes significant income long term.

Speaking here of STOCK dividends, and mutual fund dividends (which includes bond funds), but interest dividends from directly owned BONDS are a different story. Bonds pay an interest rate on the face price of the bond, and if held until maturity, they are redeemed at face value. But stock and fund dividends are subtracted from the value you already own. The stock company has earned profit, and you as an owner are receiving a distribution of profit from that stock you already own. The stock dividend is Not new income, but since it was withdrawn, it becomes Realized Gain. A mutual fund owns many stocks or bonds, collecting all the dividends, and then issues their own dividend, withdrawn from the shares you own.

How Stock and Fund Dividends Work

Dividends are Not the same income thing as interest paid by banks or directly held bonds. You do need to realize that a stock dividend payment equally reduces the stock price (dollars per share). A stock dividend payment is simply a withdrawal, just a distribution to you of the earnings you already had, so it is NOT new gain. But reinvesting it does have a strong tangible benefit (free added shares).

Before your withdrawing it, it's important to understand that whole picture about stock and fund dividends.

A company's publicly held capitalized value is their number of their existing stock shares multiplied by the price of one share. Apple's value this way computes to be over $2 Trillion. The idea of the dividend is the company deciding to distribute some of the company profit to the stock owners. The dividend money paid out (as a few dollars per share) was removed from the company's value, as a payment into your cash account. This distribution reduces the company's value by maybe many millions or more, so the stock price (which reflects the remaining value of the company) is automatically equally reduced by the same few dollars per share of the dividend that was paid. It is subtracted from the value of the stock you already own, by lowering the stock price the same dollars per share amount. Due to that corresponding stock price drop, the sum of your remaining stock value plus the paid dividend remains exactly the same sum as before the dividend, i.e., there is no gain or loss on that day (there are of course also the usual market price variations that day, but the dividend distribution did not affect the overall value). Yes, the stock price does drop equal to the dividend dollars per share, and the withdrawal reduces your stock investment, but you did not lose anything. It was just a redistribution, a withdrawal, decided by the company, not by you. There is no gain and no loss, at least Not from the dividend on that day, but it was a withdrawal and the investment is reduced, so there will be a future loss of earnings. The distribution was just from the company's stock value that you already owned before, but now is instead withdrawn and transferred to your cash. The price of the stock is reduced by the same dividend amount withdrawn, but you now have the cash difference. You can put the cash back by automatically reinvesting the dividend, which become free shares (explanation follows next below).

A stock with price $100 distributes a dividend of $1 per share
Dividend WithdrawnDividend Reinvested
Stock price is now $99, and you have the $1 per share dividend in your pocket, and a reduced stock fund for less future earning. This is a continuous withdrawal every quarter Stock price is now $99, but you have the same previous value now, with additional free shares each quarter for years of greater future earnings.
This compounding is a big deal.

First, an important tax term: Unrealized Gain. If you bought stock for $100 per share, and you've owned it awhile, and its price went up to $192, so you have a gain of $92 per share. But that is just on paper. It's yours but is in an account somewhere, and you don't actually have the money yet, and you have not paid tax on it yet, and its price is still varying. You don't know what its price might be when you might eventually sell it. So the term is that the gain is unrealized gain so far (you don't actually hold the money), and it is not taxed until you do eventually sell it, when you do Realize the gain, meaning you do take out the money then, and the gains are taxed then, and that withdrawn money is no longer in the investment.

The fact is that when a stock or fund dividend is distributed to you (subtracted from your stock value that you already own), it does withdraw that money, which becomes "realized gain", because you do have the money received, and do owe the tax then (on its gains). Your remaining stock price dropped that day by the same dollars-per-share value as the distributed dividend, so it was simply a withdrawal and the remaining stock now has less value (leaving still same number of shares but at lower price). It's actually a very good thing for the investment if you simply put the money back into the stock by "reinvesting" it, when its lower price then generates a few free new shares at the lower price, which will then (on that dividend day) be more shares at lower price for same prior value (then remains still the same prior total value if reinvested, but it is additional free shares). Yes, your reinvestment did buy the shares, but with money that was just withdrawn from the same stock, and then put back with no extra cost, so it is additional free shares at no additional cost.

Regardless if reinvested or withdrawn, you do owe tax then on the withdrawal. If reinvested, it is new purchase (which is added to your cost basis), which restores the exact previous restored value, so there is no gain and no loss of stock value on that day, but it does add a few additional free shares (at the lower price, which is same prior value, but at no additional cost to you). This usually occurs every quarter, and the future compounding really adds up.

Of course, the regular market price variations that day do still occur, but reinvesting the dividend itself causes no value change. But NOT reinvesting it does, withdrawing it reduces the value of the existing stock by the same withdrawn dollar value.

My own term: "Free" reinvested shares from dividends. You do spend your withdrawn dividend money buying the reinvested shares, but it is Not new money. It is money just withdrawn from your previous investment that you had already had. The share price was reduced an equal amount of the dividend, dollars per share. Reinvesting the dividend simply puts back the same withdrawal. The price is a bit lower then, so you acquire a few more shares than you had before, so that on that day, you still have exactly the same previous investment in dollars (slightly lower price but a few more shares to be exactly the same prior value). Due to the price drop, the dividend bought more new shares at the lower price, so it's more shares than you had before, additional shares without any new monetary investment. That creates some new Free shares. Specifically, if the quarterly dividend is 1% of price, then you get 1% new free shares that quarter. There probably are 120 quarters in 30 years, making the long term compounding be dramatically impressive. But withdrawing the dividends is oppositely dramatic in it's own way (see example of the long term cost chart at page top).

Yes, the new shares are a bit lower price that day (reduced by the same dividend dollars per share that were withdrawn). Due to the price drop, you might debate how free, but on that reinvestment first day, you do still have the same stock dollar value as before, with the same investment total dollar cost, but also a few more shares that are cost free. They should gain back the price difference soon, but you will have the extra shares as long as you hold the stock. That's more shares to grow in the future, which will soon be a big plus. It may sound small and minor, but look at the withdrawal cost table at this page top. You may not like the price being lowered, but that is just today, and if reinvested, you do still have the same dollar value (and a few free shares). So just wait a week or so, and you'll likely be happier.

How You CAN Reinvest Stock Dividends

If the dividend was $1.60 per share, and you had 100 shares, then that dividend is $160. If the stock price is $75 per share, $160 reinvested would buy 2.133 more shares. Mutual funds easily handle reinvestment of such fractional shares, but individual stocks do not. Stock exchanges work with whole shares, and strongly prefer lots in multiples of 100 shares. They have no option to trade fractional shares.

However, there is usually another way, at least for popular stocks. Many brokers now do offer a stock dividend reinvest option. They put your reinvested dividend amount into a mini-fund containing only that one specific stock. It is commonly commission-free. You don't see that brokerage mini-fund directly, but your stock account shows the 102.133 shares then, and repeats grow the shares each quarter. When you do sell it, the broker will do the two transactions, and it works out, same as expected. So yes, stocks can have the option to immediately reinvest dividends. For example, here is Vanguard's description offering reinvesting stock dividends. They and others do offer dividend reinvestment of stocks, and may be already automatically included for an IRA or Roth account. Reinvesting all dividends will increase your compounded long term growth.

So if you don't see an obvious method there to reinvest your stock dividends, then ask your broker about it.

The math of reinvestment is detailed at the end of this page, and there's also a calculator there for Computing Reinvested and Withdrawn Stock and Fund Dividends.

My purpose here is to emphasize that it's a seriously costly mistake to think of stock or fund dividends as New income to be withdrawn. The dividend is just a withdrawal of previous gains, which reduces your fund's value and its future gain potential. The withdrawal changes Unrealized Gain to be Realized Gain which is then taxed as income, but it NOT new income. Withdrawal makes it be Realized income (moving it into cash in your hand). I suspect many people interested in dividends have not thought about how it works and the effect of it. If you might be withdrawing stock or fund dividends, I hope you will rethink it. The dividend is certainly Not a gift to you, it is a distribution, simply a withdrawal from your own stock investment into your withdrawn cash (Realized Gain). If you are withdrawing when in retirement, then withdrawal was the planned goal, but if your earlier investment is still growing, the reinvestment gain can become huge over the years (or the withdrawal loss also huge).

The stock dividend simply transfers it from your stock into your cash account, which then reduces the stock price equally (same dollars per share as the dividend), so the smaller remaining investment in the stock has less value now, but you do have the cash difference. So there is no gain or loss, yet. Imagining the dividend is a gift of new income to be withdrawn is very wrong, it is simply a withdrawal from your stock, which equally reduces the value of your remaining investment. If you want to maintain the prior invested value, you can put it back by reinvesting the dividend. Reinvesting buys more shares, which is also a few more free shares than you had before. Then the current and prior total value sums are the same (no change in value on that day), but future gains do have more shares working after each reinvested dividend, which is a pretty big deal. This reinvestment purchase is added to your cost basis, so you don't pay tax twice on the dividend.

Don't be confused by a couple of things that might superficially make it sound like dividends are new additional income (but which it absolutely is NOT).

The absolute best and most optimal way to seriously maximize long term income is to reinvest that dividend. Putting the money back into the investment retains the previous stock investment value, and it will also generate some additional free shares for greater future compounded growth. That provides a very major income increase in the long term value. That's important, and very valuable long term, so don't miss seeing the withdrawal chart above.

I'd guess withdrawn dividend money likely just gets spent. But reinvested dividends see continued compounded gains.

A stock's dividend does not pay a fixed rate (not some % a year, not like bonds). The company simply decides how much profit dollars (if any) they will distribute to the owners, so they decide and declare some amount of dollars per share to distribute. Investors then may like to compare that as a percentage of stock price, but the stock price varies every day, so the dividend percentage varies every day too (but the dollars paid stays fixed). A popular method for the long term is to compute percentage from (the years total dividend dollars) / (the year end stock close price). Some companies pay no dividend, preferring to use the profit cash to fund future growth.

The returned dividend cash value is now in your direct control, cash which you can either withdraw or reinvest for additional shares of stock at the lower price, which means a few more shares than before. It is Free additional shares, meaning no additional cost than you had invested before.. The increased shares and the lower price computes to be exactly the same previous value on that first day. So your account's value change due to that reinvested dividend distribution is still zero difference on that first day. It was just a withdrawal that if it is put back (reinvested), it retains the same value. You do pay tax on that withdrawal (reinvested or not), but then the reinvestment purchase is added to your cost basis so you will not pay tax on that dividend part again.

So what's the point? Reinvested or not, there is no overall value change on that dividend day, but your investment decreases when the dividend is withdrawn, but not reinvested. If it is a good investment, then of course, the optimum thing to do is to reinvest that dividend to maintain the investment value, and it will also become additional shares for free, every year. That is future gain offered if you want it, and the Big Deal is that your additional shares (received and reinvested four times a year) are now greater future investment gain opportunity. If dividend is reinvested, then you will have additional shares for the same original investment cost. If each quarterly dividend was say $250, four times is $1000 a year of additional shares invested every year, which is compounded growth. But if that dividend cash is instead withdrawn, it has no future growth possibility, at least not in this stock or fund. It was only a direct withdrawal subtracting from your existing value. Withdrawing the dividend cash is a loss of that opportunity for much greater gain. That cost is relatively small over only a couple of years, but the loss of compounding over a few decades is a major cost of the vast majority of the investment potential. The table above shows that withdrawal cost.

But bottom line is that reinvestment of dividends is free additional shares four times a year which will have a huge impact on decades of future earnings.

There is only this one correct way to view stock dividends. Dividends are subtracted from your own stock value you already owned (from the stock's value). Any withdrawal is just subtracted from the stock or fund value. The withdrawal is taxed then, but it is NOT new gain, it is merely realized gain of cash withdrawal.

So withdrawing dividends would clearly seem a big long term investment mistake, to be only just a simple direct withdrawal that reduces both your current and future fund value (same as any other withdrawal). A typical dividend might be in range of 2% a year. Sounds small and insignificant, huh? No, it is HUGE when reinvested and compounded every year for a few decades. There's a table at the top above showing the devastating huge long term loss of withdrawing dividends in an example with a S&P 500 Index fund. Stock Dividends are valuable because reinvestment offers additional free shares, but withdrawing it is just a withdrawal from the fund, and is NOT new income (free meaning no additional cost than what you already had invested before).

The share price drop of a small dividend may be hard to notice in the numbers, but a large dividend (perhaps 8% or 12% paid only once a year in December, for example, TWCIX or VGHAX, it may be called Capital Gain instead of Dividend, but same thing) can drop your favorite stock price enough to take your breath away that day. But that price drop simply means that the dividend was paid. If you reinvest the dividend, your stock or fund will still have the same value, and also a few more shares (if reinvested, then still exactly same value on that day despite the lower price). There is no devious plan doing this, but yes, the price is automatically adjusted down, same as is done in events such as splits. Because the companies value does drop by the paid out dividend, which might be $Billions for the companies, so their remaining value did seriously drop. But you do now also have that dividend, and this is really just market action, since the stock no longer promises to pay the dividend already received by the owners, and new buyers will not bid higher to include it. True of every stock and fund that pays a dividend (and even bond funds paying interest). Any dividend lowers the price that day, so the dividend is Not income on that day. But dividend reinvestment does add a few shares (often four times every year) which certainly increases long term compounding of future gains.

You might think that since you have to pay tax anyway on the dividend paid this year, you might as well withdraw it. That might make some sense during retirement if you are withdrawing living expenses anyway, but dividends are NOT income that day, it is just withdrawn investment already owned. It is simply a withdrawal of fund value then, so the stock or fund drops that much too. But if reinvested, the overall value remains unchanged on that day (more detail below), but in the long run (without withdrawals), it is more shares which can in fact earn more, and the compounding of the additional reinvested shares (often four times a year, every year) will be a real earnings payback in the future.

Stock and fund dividends (including bond funds) are different than direct bond dividends.

There are about 65 stocks referred to as Aristocrat Stocks, which to be included in their list, the companies must be in the S&P 500 (largest US companies), and must have increased their dividend every year for 25 years, a point of pride indicating a stable business. See that Aristocrat Stocks list. But their annual increases can be small, and about half of them still pay less than 2.5% dividends (per year), and a few of those still pay less than 1%. The average dividend of all 65 is about 2.25%, but they do increase somewhat every year. If searching for high dividends, keep an eye out for a record of high gain too.

A Calculator of Dividend Reinvestment or Withdrawal

At the moment the dividend is paid, you still have the same total value as before, but your investment has decreased, and the dividend part was withdrawn as cash that you then hold. You can choose to reinvest it (do see How you CAN reinvest stock dividends above.)

If you had 100 shares at $100 per share (value $10000) and if the quarterly dividend is $0.50 per share (0.5% of $100 price), then the dividend is $0.50 × 100 shares = $50. But then the stock or fund price drops by that $0.50 per share, to $99.50.

If you withdraw the dividend money (instead of reinvesting it), you have the 100 shares at $99.50 of value $9950, and you do also have the $50 dividend money too, which is the same $10000 total value again. There was no new income, and the dividend came out of your own stock value anyway. It was just a withdrawal, every quarter, reducing your investment amount. The reduced fund value likely will gain enough soon to make it up, but this withdrawn dividend has no part in it.

If you instead reinvest the dividend same day (strongly suggested), then the $50 you put back at the reduced $99.50 price would buy $50/$99.50 = 0.5025 shares. You then have 100.5025 shares, which is 100.5025 × $99.50 = $10000 again, still the same value as before on that first day after you return the money, but still no new income from the dividend (which was your own money in the first place). However for the future, the reinvested dividend provided 0.5025 additional new shares then (0.5% more in this quarterly case, same as the dividend percentage), for free, no extra cost beyond what you had previously invested. This example is $200 buying 2.0101 more shares annually, at zero added cost to you.

So as yet on that first day, a dividend is simply NOT new dollar income either way (reinvested or not). So far it is just a withdrawal. However reinvesting it does add more shares (at no cost to you), which will contribute to future growth prospects, probably added four times each year, every year (the dividend amount may vary year to year). Dividends are not in any sense current extra income, but reinvesting dividends does increase shares by the amount of the dividend, which compounds future long term gains impressively, increasing future earnings, at no cost to you. The dividend came out your stock account value, equally reducing its share price, which reinvestment simply puts it back, by adding shares at no additional cost (free). Warren Buffet of Berkshire Hathaway has said Coca-Cola (KO, 2.7% dividend) is a dividend favorite. But I can't imagine that he has ever withdrawn a dividend? 😊 The dividend payment is distributed from the past earnings from your stock, and reinvestment is future additional free shares (usually four times a year, each year).

So assuming the dividend remains a constant dollars per share, the reinvested quarterly share count still increases 0.5% × 4 = 2% a year more shares, which really adds up in 30 years, which certainly is a gain. But if withdrawn, the stock value goes down 2% every year (which subtraction is compounded). Which is not exactly a loss since you do also have the withdrawn dividend money, but it's a huge loss in the future long term gains. My notion is that withdrawing dividends is an unimaginably bad long term plan for the investment.

Compute Reinvested Dividend

Stock Shares   Share Price $

Quarterly Dividend $ Dollars per share

% Annualized market gain each year for years


All results are always shown below, but next are optional features showing intermediate detail

Don't show intermediate detail

1. Reinvest Dividends

2. Withdraw Dividends

3. Reinvest at market rate 0%

4. Withdraw at market rate 0%

If shown, show details of:

Years
    (shows 50 years max)

Quarters
    (shows 12.5 years max)

YearPriceDiv $Dividend
Shares
Total
Shares
Value

This calculator compounds quarterly. Market price does compound ± daily, but dividends are usually each quarter. The calculator shows both cases, of withdrawn or reinvested dividends, and also shows a 0% market "no price gain" case to make the point that dividends are not yet income (dividends simply redistribute income that you already earned). But I may have mentioned that reinvested dividends do provide a few extra free dividends, every quarter, and that does increase future market earnings.

We don't know future market gain or future dividend distribution. This example's initial default values are the 10% market and reinvested dividends each year for 50 years. It assumes the $0.50 dividend per quarter does not change. These numbers seem reasonable examples. The years of an Annualized Return gain of 10% is just an example of one case that could happen (the 10% estimation is pretty close to what the S&P 500 usually does, see the first table at page top). You can enter any numbers, but the point of the calculator is only to show the concept of the withdrawn vs. reinvested difference is quite important, long term.

This calculator that will compute your numbers to show that reinvesting difference is fact (long term). The dividend dollars per share is at each payment and withdrawal, probably each quarter, or as appropriate. The math is as shown just above, but the calculator adds an estimated long term view.

Any number of years can be entered up to 100 years, which seems more than enough. If showing Quarters, it's more clear to make the years choice divisible by 4. The detail table itself contains 50 rows, so either 50 years or 12.5 years of quarters, and that will show the concepts.

The "0% gain" idea is ridiculous, because a companies stock has good years and bad. The only point here is that without any external gain, the math strongly makes the point that the dividend IS OBVIOUSLY NOT NEW INCOME. In the case 3 and 4 of "0% market gain" in this default example, the 50¢ quarterly dividend is $2 a year. So if constant and without external gain, regardless if withdrawal or reinvestment, either one reduces the $100 price to zero in 50 years. The 50 years is determined by the example's $100 initial price being 50 times that the annual $2 dividend that is removed each year (with no stock gain), so this case lasts for 50 years, but other situations will be different. Reinvestment does add more shares, but without any external gain, the value at the reduced price value remains at the same $10,000 value until the price finally goes to zero. Withdrawal simply reduces the investment by that amount. But there is no value added by the dividend on that first day.

The 0% market gain is of course Not a real case, but it removes all external gain, then it shows the dividend itself never adds income. The future gain of additional shares does add extra income. At each quarter, the dividend payment reduces the price, but then reinvestment restores the previous value. However in this 0% gain experiment, reinvestment means price eventually becomes zero. I'm not sure of the value math then, Infinity or Zero, but I think Undefined is the best value guess. We can't do math on infinity, but otherwise any number times 0 is 0. If it does multiply to be 0, I would suggest taking the money out sometime before 50 years. 😊 But when the math blows up, I'd think the previous value is more reasonable than zero or Undefined. But the dividends alone are simply Not new income, reinvested or not. The withdrawal case eventually just withdrawals the entire $10,000 value, then leaving zero remaining.

The only point here about 0% gain is that the math shows that dividends themselves are in no way any new income whatsoever. A dividend is just a distribution of your own stock's value, not a gift. So the dividend is just a withdrawal from the stock, but you can put it back and get new free shares every quarter, which is then great when there is future gain. Think this out before actually withdrawing the dividends.

Gain of 0% is of course not a real situation (any gain would increase the price and value), but this example to show that the dividend itself is NOT new income to be withdrawn. The dividend is a simple withdrawal then, and withdrawing dividends diminishes the investment, but reinvestment puts it back and grows. If your notion is to withdraw dividends, you should rethink that. Again, see How you CAN reinvest stock dividends

The reinvested free shares probably occur every quarter, 200 times in 50 years. The shares purchased with the reinvested dividend dollars also increase the fund cost basis, so those dollars are not taxed again. Reinvesting dividends is important, again, notice the withdrawal cost in the table at page top.

Dividends as percentages: Stock dividends are defined as "dollars per share". Any "percentage of price" number of course varies with every day's following prices, so is Not meaningful in any absolute sense. Two exceptions are that market statistics show a "current quarter" dollar number of the dividend and the stock price on the day of the dividend. That price defines the number of shares that reinvestment buys. And we may also see a "Trailing Dividend Yield" which is the (sum of the past years total dividends) divided by that year end closing price, which is historically meaningful. A "Forward Dividend Yield" is an estimate of the future dividends and prices, not necessarily always accurate.

Some might consider any withdrawal as income, but if it comes from money you already had, it only distributes some of the same value you already had. So it may be in your hand then, but you gained no new value. Any withdrawal becomes "realized gain" instead of "unrealized gain". So in fact, then you owe tax on some of it earlier than otherwise. But future growth from the long term string of reinvested dividends is quite valuable, see the chart of cost of withdrawing dividends chart at top of this page. I'm hoping it registers to everyone as significant fact.

So if you imagine dividends are added income that you can withdraw without affecting your remaining fund value, you need to rethink this. It is Not new income, because while dividends do add cash to your account, this then lowers your fund price to the sum's same previous total value. So it was Not income, the result is simply a withdrawal of your own fund money. However, reinvested dividends do provide a few additional free shares for future price gains.

Summary of Dividend Payment Details

Many probably don't understand market dividends correctly or completely, but they ought to make the effort.

Near 80% of the S&P 500 companies pay dividends in some degree. See a list of these ranked by dividend (however the dividend is "dollars per share", so the percentage number also depends on current price, which routinely changes a bit every day). If interested in high dividends, you should also check out the performance of that ticker too, high dividend does not mean high performance. The S&P 500 index funds distribute that S&P 500 dividend proportionately into your fund shares. You might not even realize you are getting a dividend, but if reinvestment is not already set up, it should appear in your account in your brokers settlement money market fund. That would be withdrawals that reduce your stock investment value.

Don't misunderstand, reinvested dividends are very valuable, and definitely are a huge contribution to future long term income. Maybe not on first day, but if reinvested, they continually buy more shares each year which will compound additional future earnings extremely significantly. But if you withdraw the dividends, there was No income due to the price drop. You withdraw not only the dividend (which is a tiny part of the overall loss coming), but also and most importantly, the loss of their future earnings is repeated every year instead of being compounded year after year, which would have built to a vastly larger value. If you withdraw the dividends, it was simply a withdrawal, a distribution of your own money already earned.

Hard Evidence That Dividend Really Causes Stock Price Drop

We pay income tax on the Realized dividend in the current year, regardless if withdrawn or reinvested. That is just a detail of congressional law which requires it. And since tax on the dividend will be paid, buying stock with any tax paid reinvested dividends increases cost basis, compensating by lowering the final taxable value when sold. Since 2012, the brokerages are required to keep track of dividends reinvested (adds to cost basis), but unknown cost basis due to older past reinvested dividends would be a tax problem when selling older investments. Tax on the compounded final result would be paid when sold.

The dividend price drop is real, well known, and automatic. Stock prices vary every day, which can obscure the dividend price drop. So it may be hard for market beginners to believe that the dividend drops price (with zero income gain) on the day dividends are paid, reinvested or not. I'll try to help show it clearly does drop, which produces zero dividend income on that day. For clear factual evidence of the price drop, just look at the stock or fund stock price history (those that show this detail), for example these are from historical stock prices on Yahoo Finance (but not all stocks show the full detail).

DateOpenHighLowCloseAdj Close
Vanguard S&P 500 Index fund VFIAX
Mar 23, 2022149.46151.34149.22151.01151.01
Mar 23, 2022$1.372 Dividend
Mar 22, 2022417.68417.68417.68417.68416.31
417.68 - 1.372 = $416.31
Apple AAPL
Feb 10, 2023151.34149.22151.01149.22157.28
Feb 10, 2023$0.23 Dividend
Feb 09, 2023153.78154.33150.42150.87150.64
150.87 - 0.23 = $150.64
Microsoft MSFT
Feb 15, 2023268.32270.73266.18269.32269.32
Feb 15, 2023$0.68 Dividend
Feb 14, 2023272.67274.97269.28272.17271.49
272.17 - 0.68 = $271.49
Vanguard Intermediate-Term Bonds VFIDX
Feb 28, 20238.348.348.348.348.34
Feb 28, 20230.025 Dividend
Feb 27, 20238.338.338.338.338.30
Bond funds also   8.33 - 0.025 = $8.30
Vanguard Health Care VGHAX
Dec 28, 202288.7188.7188.7188.7188.71
Dec 28, 20220.681 Dividend
Dec 28, 20220.987 Capital Gain
Dec 27, 202290.9090.9090.9090.9089.23
90.90 - 1.668 = $88.23
American Century TWCIX
Dec 21, 202276.8276.8276.8276.8276.82
Dec 21, 20220 Dividend
Dec 21, 20227.799 Capital Gain
Dec 20, 202283.3683.3683.3683.3675.56
A large change gets noticed:  83.36 - 7.799 = $75.56

Not all stocks show the full detail in this same way, but nevertheless, the price drop still happens. For example, even the first entry VFIAX at Yahoo does not show the March 2023 dividend. Stock dividends are taxed as a realized distribution, mostly Capital Gain (meaning gains taxed at a lower rate, if after 60 days, per USA IRS tax rules).

The dividend cash is transferred to you, as a withdrawal from your stock or fund value (including bond funds, but directly held bonds instead pay interest, like a bank). If you are in retirement, you might figure that since you pay tax on it, you might as well keep it, but the stock account does go down, and retirement can last many years. You can put it back by reinvesting it (especially if in a fund). Automatic reinvestment same day retains exactly the same previous stock dollar value, but at a lower price, and with a few extra free shares and a higher cost basis. And the next day opening may have other routine regular market price changes overnight too. You likely may notice the price drop in the larger cases, but it just means the dividend was paid.

This data in this table is not updated very often to a later date, but it would remain the same point. The stock price changes a bit every day too, but on the day of the dividend, the "Adjusted Close" price simply subtracts the exact dividend from the Close Price. The dividend is the difference, and withdrawal changes that portion from unrealized gain to realized gain (which is taxed now). You can pocket it or put it back by reinvesting it. Reinvesting it becomes free shares. Yes, you did just buy them, but with money you just withdrew from the same stock and put back, so the difference is that you still have the same prior stock value, but more shares now (of the same value and at no extra cost, and you do owe some tax on the dividend now).

The fund price drops because the paid out dividend reduces the remaining value of the company. The prices of the company stocks in the fund are dropped (those that paid a dividend). In your view, the money simply transferred from the stocks you own to the cash now in your account, so your own value did not change on that day, but there was no gain either. On that dividend day, this becomes the stocks actual effective Close price. Other overnight market action can affect the next stock Open price too. However a mutual fund technically does not have an Open price, since it can only be bought or sold at the new Close price each evening day (with the exception of the new ETF funds which are regularly traded when the market is open). In these example instances, the stocks did also change a little more overnight until next day, but the idea about dividends is in the Close price.

There are differences in this reporting style among various funds and stocks. Some do not even show this added detail, but it is still present. Or there can be other factors, like stock splits in companies in the fund. Plus, the 500 individual S&P 500 fund companies may pay their dividend at various dates different than the S&P 500 fund passes the total along. So in some cases you might notice that the Adjusted Close price drop does not exactly match the dividend subtraction. There can be other causes for price adjustment (splits, buying or spinning off other companies, etc), but the stated dividend amount shown is in fact reported correct, and that it includes the Capital Gains portion of the dividend. Most historical results are correct and complete, especially the adjusted price, but I've seen a few cases that the dividend value shown did not include the capital gains portion of the dividend. A part of the dividend is often taxed as capital gains, and the rest is called Dividend, which must be what sometime confuses their computer, but the actual dividend is the total of the parts. Even if the dividend value is not reported correctly, the adjusted close price should still be correct.

The Adjusted Close prices account for corporate actions like dividends, splits, spin offs (companies buying companies or selling divisions), or issuing or buying back shares. These are actions of individual companies, and a fund reflects the total. Some of these adjustment reasons affect all prior prices in the history. Here is a link to the math of Adjusted Close. Also other pages about Adjusted Close are found at Google. These clearly explain that dividends drop the share price equally. And of course, it does happen. Again, this is a known fact, and if a nonbeliever, I suggest seeing Google discussions about closing price adjustments.

So YOU should realize that the dividend is Not free money. It is Not New income, but is instead just a withdrawal from your previous stock investment that you already owned. The distribution simply moves some of it from a gain on paper to cash in your account, which is a withdrawal from the stock. Withdrawing the dividend (or any other regular withdrawal) is simply reducing your future investment opportunity potential, because withdrawing it has an amazingly large percentage cost (loss) over a few decades of investment. The term Dividend does not mean a new income source, but is instead just a distribution of the gain you had already received in the stock value. That received distribution reduces the remaining stock value, which you need to realize that. And realize that you can reinvest the dividend for a surprisingly greater future gain.

A mutual fund itself (other than ETF funds) is not bought by price bidding. ETF funds can be traded at market prices anytime the market is open. But a regular mutual fund only has one computed value once a day after market close, which is its only price until the next close. A mutual fund cannot be bought or sold until the next close and then at its price. This dividend price reduction effect is said due to the value of companies in the fund, but that price only depends on what buyers are willing to pay. But dividends do lower the value of the paying companies, which in turn automatically lowers the stock or fund price.

The dividend (the gain portion of it) is taxed as if income, reinvested or not. Reinvested dividends are added to the fund Cost Basis (more shares are bought at the reduced price), so the cost basis does reduce future tax when sold (so the dividend is not taxed twice). The reinvested dividend is added to future price gains when reporting fund total return. Sure sounds like income, but look at the details that actually happen, and it cannot be found. On the day the dividend is paid, the stock or fund price is immediately adjusted down equally (so there was no income yet).

Reinvesting the dividend does buy more shares which will earn additional growth in the future, which is a big plus... the reduced price will recover and growth will be greater with more reinvested shares, as it accumulates and compounds (which is income then). That does not correct the situation, it simply ignores it. But if the dividend is instead withdrawn on that first day, then there is no additional gain, not on that day or any day. It was then just a withdrawal, different in that it leaves all of the same previous shares but at the lower price (whereas ordinary withdrawals reduce the shares but don't affect the price. However the effect on fund value is the same). So don't withdraw the dividends imagining it was income. Reinvest it for greater future growth, which in time will increase income.

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