Investors often get caught between wanting dividends for income, and capital gains for growth. But in some ways there is little difference between the two. Let’s say you have a $100,000 portfolio of stocks that pays on average a 4% dividend. So at the end of the year, the account is worth $104,000, $100,000 in equity and $4,000 in cash from the dividends. What if instead of that you had $100,000 worth of non-dividend paying stocks that increased in value by 4%. Your account is still worth $104,000.
The difference is that in the first case, there is $4,000 in cash available to be withdrawn. In the second instance, all the money is still in the stocks. But there is nothing to prevent you from selling $4,000 worth of stock. And if you did guess what? You’d have $100,000 of equity and $4,000 in cash. Tada! It’s the same thing.
There are some advantages of harvesting capital gains in this way, such as timing the tax hit for when you sell, and being able to harvest some losses if you want a tax deduction. And there are of course disadvantages, including maybe selling some shares when the market has declined.
But the important thing to remember is, it’s all your money. You can get at it any way you need to. And that gives you the ability to create your own dividends from capital gains on your non-dividend paying stocks.