Dividend income projector — the cost of spending the dividends

Each year's dividend is declared on the balance at the start of that year, which is why year one is identical under both paths. From there they separate: taking the cash leaves the portfolio growing at the capital growth rate alone, while reinvesting compounds it at growth plus yield, so the following year's dividend is struck on a larger base. Repeat that for twenty or thirty years and the income lines pull apart — the reinvested path eventually pays more income per year than the cash path does, having started identically.

The yield is a fixed percentage of the portfolio every year, which is a strong assumption: real dividends are set per share by companies that cut them, and yield on a rising market tends to compress rather than hold. Growth and yield are both constant for the whole horizon. Critically, no tax is applied to any distribution, and in three of this site's four countries a dividend is taxed on arrival — which makes the reinvested path better than shown here, because the cash path is handing over a slice of every payment on the way through.

Is taking dividends the same as selling units?

Economically it is very close, and the difference that remains is mostly tax and control. A dividend reduces the fund's value by the amount paid, so receiving one leaves you with exactly what selling that value would have: the total is unchanged either way. What differs is that a dividend arrives whether you wanted it or not, and in most jurisdictions it is taxed on arrival, whereas a sale is timed by you and taxed as a gain.

Why does the reinvested path eventually pay more income?

Because the income is a percentage of a balance that has been growing faster. Both paths start with the same yield on the same amount, but reinvesting adds the dividend back to the base, so next year's identical percentage is struck on more money. Given enough years the reinvested portfolio's annual income overtakes what the cash path pays, despite the cash path having paid out every year in between.

Should I choose a fund with a higher yield?

A higher yield is not more return, it is more of the return delivered as cash — and in most European tax systems that is the worse form to receive it in. A high-yield fund is also making a concentrated bet on a particular type of company, which is a real portfolio decision hiding behind a number that looks like income. Judge it on the underlying exposure and its total cost, not on the yield.

• Accumulating vs distributing: the answer changes with your country
• Dividend calendar — when distributions land and why the date matters
• Dividend payment history — every distribution a fund has paid