I Want an Income Each Month

So do we all. The question is how to produce it without kneecapping total return or blowing up in a downturn. Classic corporate‑finance theory says there’s no free lunch in dividends versus selling shares - income is fungible, and an engineered distribution from capital is economically equivalent to a dividend, taxes and frictions aside.

Of course, theory lives in a perfect world. Miller & Modigliani acknowledged that once you add frictions like taxes, transaction costs, or investor preference, dividend decisions can appear to matter.

MM discussion of “imperfections” - why in practice, taxes, transaction costs, and investor behaviour can tilt preferences for dividends.

Miller & Modigliani formalised this in 1961: mathematically, the value of a firm depends on earnings, growth, and return assumptions - not the dividend payout ratio.

Miller & Modigliani (1961) formula linking firm value, growth rate, and returns - showing why dividend policy alone doesn’t drive total return.

Miller & Modigliani 1961:

dividend-policy-growth-and-the-valuation-of-shares-3rg3wfs2am.pdf

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  In practice, total‑return investing with a spending rule usually beats chasing yield. Vanguard lays out why: targeting income narrows diversification and often raises risk without improving sustainability, whereas total‑return gives you flexibility to draw from income and gains. One of their key illustrations: whether value comes back as yield or capital appreciation, it’s economically equivalent - income is fungible.

Mathematical equivalence of dividend yield and price appreciation - supporting the idea that engineered withdrawals mirror dividends.

Your real enemy in retirement isn’t a low dividend - it’s sequence risk: taking withdrawals just as markets fall. Bengen’s original analysis in the 1990s gave rise to the famous “4% rule.” His research showed that with a balanced portfolio, an initial withdrawal rate of 4% (inflation-adjusted) typically sustained a 30-year retirement - but the outcome depended on market sequence.

Bengen (1994) analysis - A portfolio with 50% equities and 50% bonds could support a 4% inflation-adjusted withdrawal over 30 years in most historical scenarios, but outcomes still varied with sequence of returns.

That’s why drawdown research - from Bengen’s original work to subsequent UK guidance - emphasises sustainable rates and buffers.

Increasing equity exposure improved the odds of long-term sustainability. With 75% stocks, the same 4% withdrawal rate gave portfolios more resilience, though it also meant tolerating higher short-term volatility.

Bengen (1994) analysis - With 75% equities, the same 4% withdrawal rate had greater long-term durability, highlighting the role of growth assets in reducing the risk of running out of money.

Bengen reprint: 

Determining Withdrawal Rates Using Historical Data.pdf

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FCA thematic review TR24/1: 

FCA- Retirement income advice thematic review.pdf

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A practical blueprint many GIP members use:

• Keep 18-24 months of planned withdrawals in short‑duration bonds and cash to ride out equity squalls.

• Own a globally diversified equity sleeve for growth, not just dividend yield.

• Set a spending band (for example, target 3.5-4.0% with guardrails that trim or top‑up withdrawals after big market moves).
  

• Rebalance annually to replenish the cash bucket from winners.

This is not theory - it’s what the evidence points to when the goal is reliable cash flow plus longevity of capital. If you love dividends, fine - prefer quality, valuation‑aware payers and remember the income is a by‑product, not the purpose. The purpose is meeting your spending without running out of money.

Sources:  M&M dividends: https://scispace.com/pdf/dividend-policy-growth-and-the-valuation-of-shares-3rg3wfs2am.pdf; Vanguard total‑return: https://www.vanguard.co.uk/content/dam/intl/europe/documents/en/managing-the-low-yield-envivronment-gbp-en.pdf

; Bengen: https://www.financialplanningassociation.org/sites/default/files/2021-04/MAR04%20Determining%20Withdrawal%20Rates%20Using%20Historical%20Data.pdf

; FCA TR24/1: https://www.fca.org.uk/publication/thematic-reviews/tr24-1.pdf

; Sequencing risk explainer: https://www.schwab.com/learn/story/timing-matters-understanding-sequence-returns-risk

. Schwab Brokerage Disclaimer: This article is for educational purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results, and investments can go down as well as up, meaning you may not get back the amount you invest. The strategies, studies, and frameworks discussed are presented for general information and may not be suitable for your individual circumstances. Tax treatment depends on your personal situation and may change in the future. Before making any investment or withdrawal decisions, you should consider seeking professional advice from a regulated financial adviser. Alpesh Patel OBE www.campaignforamillion.com