Source of income: from dividends vs sale of principal or security

Question

Source: P172, P214, ETF for Dummies, 2nd Ed (2011) by Russell Wild:

P172: First, if you need a steady stream of income, nothing is stopping you from creating artificial dividends by selling off any security you like. You may pay capital gains tax, but that will be no higher than the tax on dividends. In the end, whether you pull $1,000 from your account in the form of recently issued dividends or $1,000 from the sale of a security, you are withdrawing the same amount. And what if one month you find you don’t need the income? You can sell nothing and pay no tax, whereas with a high dividend ETF, you’ll pay the tax regardless.

P214: Some people have this notion that withdrawing dividends from savings is somehow okay but withdrawing principal is not. Don’t make that mistake. The reality is that if you withdraw $100 from your account, it doesn’t matter whether it came from cash dividends or the sale of stock.

Would someone please explain the "mistake" on P214 and why it's a mistake?

How and why does the sale of financial instrument equate to the receipt of dividends?
If I sell a financial instrument that later appreciates in value, then this profit opportunity is lost.
In the case of a dividend, I'd still possess the financial security and benefit from the stock's appreciation?

Answer 1

The trend in ETFs is total return: where the ETF automatically reinvests dividends. This philosophy is undoubtedly influenced by that trend.

The rich and retired receive nearly all income from interest, dividends, and capital gains; therefore, one who receives income exclusively from dividends and capital gains must fund by withdrawing dividends and/or liquidating holdings.

For a total return ETF, the situation is even more limiting: income can only be funded by liquidation.

The expected profit is lost for the dividend as well as liquidating since the dividend can merely be converted back into securities new or pre-existing. In this regard, dividends and investments are equal.

One who withdraws dividends and liquidates holdings should be careful not to liquidate faster than the rate of growth.

Answer 2

Some people have this notion that withdrawing dividends from savings is somehow okay but withdrawing principal is not.

Note, this notion.

Would someone please explain the "mistake" on P214 and why it's a mistake?

Because there may be times where withdrawing principal may be a good idea as one could sell off something that has gained enough that in re-balancing the portfolio there are capital gains that could be used for withdrawing in retirement.

How and why does the sale of financial instrument equate to the receipt of dividends?

In either case, one has cash equivalents that could be withdrawn. If you take the dividends in cash or sell a security to raise cash, you have cash. Thus, it doesn't matter what origin it has.

If I sell a financial instrument that later appreciates in value, then this profit opportunity is lost. In the case of a dividend, I'd still possess the financial security and benefit from the stock's appreciation?

One could argue that the in the case of a dividend, by not buying more of the instrument you are missing out on a profit opportunity as well. Thus, are you out to make the maximum profit overall or do you have reason for taking the cash instead of increasing your holding?

Answer 3

All that it is saying is that if you withdraw money from your account it doesn't matter whether it has come from dividends or capital gains, it is still a withdrawal.

Of course you can only withdraw a capital gain if you sell part of the assets. You would only do this if it was the right time for you to sell the asset.