And here I am! I almost didn't see this because I've been on flights all day. How lucky that I saw it, eh?
I can see the reactions forming in people's heads, to my post. "If you're only taking out 3.5% using the dividend, then how on earth would you deplete capital given that many stocks easily pay dividends of that size?"
(1) there's still a pervasive misunderstanding of dividends, treating them like newly generated free money. That's not what dividends are. SWR studies don't treat dividends in any special way... they are analyses of total returns, because that's all that matters. Dividends are not free money; they are part of total return.
(2) sequence of return risk and LUCK. This is the reason that capital doesn't last forever even though you're extracting less than the average long term growth rate. If you get unlucky and get a bad series of losses, then you can deplete the capital even at 3.5%. Heck, you can even deplete capital at 3.0% withdrawal. It's a matter of luck... SWR studies sweep a very wide range of probable outcomes.
(3) the sad reality is that the SWR studies have told us that "portfolio failure" (capital depletion) is a possibility even if you're only extracting 3.0% to 4.0% of the initial amount, plus inflation adjustment. Yes, I really do mean capital depletion... you are NOT assured to preserve your capital, despite dividend growth, despite long term high stock returns. But it's about probability of portfolio failure. Then the question becomes, how confident do you want to be that your money will last? Maybe 90% probability that your money will last 30 years is good enough for you.
(4) Remember that the studies look at 30 years of capital preservation. Not indefinite. If their simulation shows that you end up with $2 left in year 30, that's considered success. This is probably not what many people interpret when they hear the term "sustainable withdrawal rate"
(5) because sequence of return risk is an important factor, and it's not all about high returns, fixed income is also recommended. Taking a pure stock allocation does not make your capital last longer. Source: SWR studies. People around here seem to love the idea of outlandishly high stock allocations, even though SWR studies say that your money will last longer if you have some fixed income. Maybe as much as 50% fixed income.
(6) the good news is that you will be OK as long as you can be flexible about how much you extract from the portfolio. If you reduce your withdrawals in bad years of the stock market, the money will last longer. Taking a dividend is a form of extracting cash from the portfolio. Reinvesting the dividend instead would be leaving the money in the portfolio.
(7) let me add this just to stir up more trouble. Taking a cash dividend is just as destructive to a portfolio as selling shares during a steep drop in prices. They are equivalent. So dividends do not add inherent safety or sustainability to a withdrawal regime, nor do they insulate you from a market crash. If you have a stock that pays big dividends, and you take those dividends as cash instead of reinvesting during depressed prices, you are causing harm to your portfolio.
Proof of (7) is, what would happen if you reinvested those dividends instead of taking them out as cash? At the very depressed stock prices, your reinvestment of the dividend will produce a very high return going forward. This is the return you deprive yourself of by taking the dividend out as cash.