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This is off the back of my previous question where answerers established that dividends are equivalent to selling no matter market conditions (tax and transaction costs aside).

Selling $100 worth of shares is equivalent to a $100 dividend, but selling when? It can't be a single sale, as the exposure to volatility is different. My single sale of $100 could occur on a day the market happens to temporarily plummet 90% for just a day, and I lose my whole shareholding. This is not a risk with a $100 dividend.

Update: This is incorrect. See my answer below.

As dividends are less impacted by day-to-day volatility than a single sale on a random day, what precise selling pattern are dividends theoretically equivalent to?

The closest equivalent I could think of was selling a small amount every day, as this likewise mitigates day-to-day volatility. Thus are dividends essentially being "dollar cost averaged" across the quarter (or whatever the dividend frequency is)? Or am I missing something?

Max
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The relevant date is the ex-dividend date. You are only eligible to receive the dividend if you hold the share on that date, thus the value of the share is decreased by the dividend amount immediately afterwards. The risk exposure regarding the exact dividend amount is very concentrated on the ex-dividend date and not spread out. Indeed, it was or is common for some institutional investors to lend out their shares around the ex-dividend date, though mostly for tax reasons.

If the company is stable and boring and not growth-oriented, the dividend will typically be the company's earnings per share across the previous quarter or year. However, this is not an inherent property of dividends. The company can freely decide on the dividend amount, which could realistically be anything between zero and almost the current share price. It is not unheard of that companies take on debt and/or accept negative growth in order to have enough cash to pay a stable dividend.

If the dividend is based on prior earnings, then there is a kind of averaging effect because the company earns this money across multiple months. But the same is the case for case for companies that don't pay dividends: their earnings increase the value of the company and therefore the value of the shares as well, and this growth is also spread out across multiple months.

You propose a scenario that a sudden dip would force you to sell all your shares in order to get the same amount of money as a dividend. But if a company were to pay out all of its value as a dividend, the company would be worthless afterwards – the end result is the same. While it's intuitive that a company's share price cannot fall below the dividend, it's more accurate to say that the share price cannot reasonably fall below the book value of the company's assets. Also, the dividend is not known in advance.

Caveat: this answer assumes an efficient market that is able to price assets correctly, that bookkeeping is correct and non-fraudulent, and that the company is not close to bankruptcy.

amon
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Selling $100 worth of shares is equivalent to a $100 dividend, but selling when? It can't be a single sale, as the exposure to volatility is different. My single sale of $100 could occur on a day the market happens to temporarily plummet 90% for just a day, and I lose my whole shareholding. This is not a risk with a $100 dividend.

The penny dropped this morning that this, while intuitive, is incorrect. The risk of selling on a transient 90% down day is the same as the risk of not buying with the income from the dividend on a transient 90% down day.

Max
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