But for a younger generation, the distinction between principal and income seems almost meaningless. Where is the value in dividends, when stocks yield barely 1 per cent? If you really need money, you can always cash in a few shares.

I think both views are ill-informed. Here's why: Clipping Coupons Lately, I have heard a lot of grousing from retirees about the stock market's lowly dividend yield.

"For older people, who hold onto that rule that says you shouldn't dip into capital, high dividends might be what they need to maintain their standard of living," says Meir Statman, a finance professor at Santa Clara University in Santa Clara, Calif. "To them, dividends are the equivalent of another Social Security check."

Those in the work force see things differently. "For young people, whose retirement is far off, dividends are at best a nuisance and at worst a constant temptation to spend," Statman says. In other words, both older and younger investors are worried about their lack of self-control, but for different reasons. Younger investors don't want dividends, because they know they will spend them. Older investors don't want to touch principal, because they worry about depleting their nest egg.

Lately, younger investors have been winning the argument, as reflected in shrinking dividend payouts. "My personal belief is that companies will continue to pay dividends," says Clay Singleton, a vice president at Chicago's Ibbotson Associates. "But it's highly unlikely that we'll see dividend payout rates this decade that are high by historical standards."Rather than sending shareholders fat dividend checks, companies are using earnings to expand their business and buy back stock. From a tax standpoint, this makes sense.

If a company buys back shares or expands its business, the company's stock should climb. That share-price increase will be taxed as capital gains, with the tax bill delayed until investors sell their shares. By contrast, if a company pays a dividend, shareholders are dunned immediately at the higher income-tax rate.

Still, dividends deserve a little more respect. In stock-market declines, they provide cash to income-hungry investors who otherwise might have to sell shares at fire-sale prices. In fact, historically dividends have been a fairly reliable source of rising income. Suppose you were born Jan. 1, 1926, and were immediately given a portfolio of the stocks that make up the Standard & Poor's 500-stock index. Over the next 74 years, you didn't sell any shares and simply lived off diviends. According to Ibbotson, your annual income would have grown 155 per cent over the period, after adjusting for inflation.

True, your income fluctuated somewhat, rising in 45 years and falling in 28 years. But even at the depth of the Great Depression, the spending power of your dividends would have been only 14 per cent below that of your first year, 1926. Dividends dipped again during World War II, so that in 1946 your inflation-adjusted income would have been 15 per cent below 1926's level. But that turned out to be the low point for dividends during the seven-decade stretch. Sacrificing Principal You would no doubt have been happy with your 74 years of dividends. But maybe you shortchanged yourself.

According to Ibbotson, while you spent your dividends, your stocks would have grown to 12 times their initial value over the 74 years, even after allowing for inflation. Not dipping into principal meant a lot of unnecessary penny pinching. "There are numerous ways clients understand principal," says Eleanor Blayney, a financial planner in McLean, Va. "They all come in and say, 'I don't want to spend principal.' When you explore with them what that means, some very interesting things come out."Ms. Blayney says clients use three definitions of principal. Most feel they can spend dividends, but can't sell stocks. Others insist on maintaining some nominal amount and feel free to spend everything in excess of that sum. Finally, "some do this mental accounting where their principal becomes whatever they had yesterday," she says. "They look at the current value and they bank it."In truth, if you are really concerned about preserving principal, you should focus on maintaining your portfolio's inflation-adjusted value. These days, that would mean that, after all withdrawals, your portfolio needs to grow 2 per cent to 3 per cent a year.

But if you are living off your portfolio, don't get too stuck on this number, for two reasons. First, if you own stocks, there will be years when your shares tread water or lose money. In those years, if you insist on maintaining your principal's inflation-adjusted value, you wouldn't be able to spend anything.

Second, for your nest egg to support you all the way through retirement, you don't need to maintain your principal's inflation-adjusted value. Even if your portfolio loses a little ground to inflation each year, you should be able to sustain the same standard of living throughout a 20- or 25-year retirement. To get your income, you would spend your dividends and occasionally create your own dividends, by cashing in some shares. What about the taxes you trigger when selling stock? No matter how big a profit you have on your shares, the tax bill from selling them will be less than the income taxes on a comparable amount of dividends.