Would you buy this product?

It is a financial instrument. The minimum buy-in is $10,000. You get a 10% dividend each year, but the product's value decreases by 5% at the same time. The starting price per share is $20 or 500 shares. The goal is to keep losses to 5%, but generate enough capital to be able to payout 10%

Year 1- Value of $20, dividend payout is $2.
Year 2- Value of 19, dividend payout is $1.90
Year 3 Value of 18, payout is $1.80.
Year 4 is 17.10, and payout is $1.71
Year 5, the value is $16.27, the payout is $1.62

If you invested $20,000 in Year Zero, your investment is now worth $16,270, but you have collected $9,030, for a total of $25,300.

If you keep the instrument, its value and payout will drop yearly. What would be the sweet spot for selling that gives you the best financial outcome? Even as the stock price falls, the payout is still 10%, so a buyer at any price will get a 10% return their first year.

There is no sweet spot; the total value (current value + total dividends paid out) always increases.

At the start, the value is 10,000, and the total of the dividends paid is 0.
After 1 year, the value is 10,000 x 0.95, and the total of the dividends is 0.1 x 10,000
After 2 years, the value is 10,000 x 0.95^2, and the total of the dividends is 0.1 x 10,000 + 0.01 x 10,000 x 0.95 = 0.1 x 10,000 x (1 + 0.95)
After 3 years, the value is 10,000 x 0.95^3, and the total of the dividends is 0.1 x 10,000 x (1 + 0.95) + 0.1 x 10,000 x 0.95^2 = 0.1 x 10,000 x (1 + 0.95 + 0.95^2)
...
After N years, the value is 10,000 x 0.95^N, and the total of the dividends is 0.1 x 10,000 x (1 + 0.95 + 0.95^2 + ... + 0.95^(N - 1))
= 10,000 x 0.95^N + 1000 x (1 - 0.95^N) / (1 - 0.95)
= 10,000 x 0.95^N + 20,000 - 20,000 x 0.95^N
= 10,000 x (2 - 0.95^N)
0.95^N decreases as N increases, so the value + total dividends increases as N increases.

Another way to look at it:
Each year, set aside half of the dividend. The sum of the set aside dividends equals the current value, so the total = 10,000 + the other half of the set aside dividends, which always increases.

Thank you. It seems that, in theory, you'd never run out of money, but in reality, wouldn't losing 5% in value each year eventually bring the value down to the point where the payout is near zero? A one-year investment yields 5%, but in the second year, you get 10% of $19.50, and in the third year, the payout is based on $18,etc. Meanwhile, your initial cost was $20 a share.
Using round numbers, after X years, the price per share is down to $15, and the dividend is $1.50. If you buy the stock today, the dividend is 10%, but if you bought it years ago, at $20, the dividend is only a 7.5% return. The longer you hold it, the lower the return on your investment. The longer you keep the stock, the lower your return each year., yet the value increases.
If such a product existed, it would be a good short-term investment but less valuable in the long run. It's an income product and payouts would not be reinvested, so there would be no compounding. Or am I missing something?

Quote: billryan

It is a financial instrument. The minimum buy-in is $10,000. You get a 10% dividend each year, but the product's value decreases by 5% at the same time. The starting price per share is $20 or 500 shares. The goal is to keep losses to 5%, but generate enough capital to be able to payout 10%

Year 1- Value of $20, dividend payout is $2.
Year 2- Value of 19, dividend payout is $1.90
Year 3 Value of 18, payout is $1.80.
Year 4 is 17.10, and payout is $1.71
Year 5, the value is $16.27, the payout is $1.62

If you invested $20,000 in Year Zero, your investment is now worth $16,270, but you have collected $9,030, for a total of $25,300.

If you keep the instrument, its value and payout will drop yearly. What would be the sweet spot for selling that gives you the best financial outcome? Even as the stock price falls, the payout is still 10%, so a buyer at any price will get a 10% return their first year.
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I would ignore the “value” declining 5% each year. The principle seems to be you pay $10k now and get a stream of cash flows in the future that looks like:

Year 1: $1,000
Year 2: $950
Year 3: $902.50
. . .
Year 10: $630.25
Etc forever (in theory).

Is this a good investment depends on the applicable discount rate.

This stream of cash flows is NPV $0 if the right discount rate is 5%. If the right discount rate is lower, then it is NPV positive and if it is higher then it is NPV negative.

I see no point in this kind of product. It either produces a good return by what it is invested in, or it isnt worth spit. I can withdraw any principal I want myself without any pre-planned withdrawal which is probably inflexible and can be when you don't want that.

I always figure once you get them to admit they are paying you back using principal partly, they're 'busted' ... they probably didn't want you to quite realize that

Quote: odiousgambit

I see no point in this kind of product. It either produces a good return by what it is invested in, or it isnt worth spit. I can withdraw any principal I want myself without any pre-planned withdrawal which is probably inflexible and can be when you don't want that.

I always figure once you get them to admit they are paying you back using principal partly, they're 'busted' ... they probably didn't want you quite to realize that
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The point of this is to generate income. It can be sold at any time; no preplanned withdrawals are needed. You can take the payouts or deposit them into another account, but there is no reinvesting.
Inflation hurts you, as prices rise while your income dips.

it's an investment that pays 5% per year with some weird liquidation stuff going on. No worse than plenty of other things I buy, but not really any better than lots of similar things. So maybe.