Many investors pursuing early retirement are drawn to dividend-paying stocks. The promise of receiving consistent cash flow without selling shares is psychologically comforting. However, modern financial theory shows that focusing solely on dividends can introduce inefficiency—this is the dividend myth.
From a purely mathematical standpoint, a dividend distribution is not free money. When a company pays a dividend, its share price drops by the exact amount of the payout. Whether you receive a $1 dividend or sell $1 worth of shares, your total economic position remains identical. Focusing on total return (growth plus dividends) offers a broader opportunity set.
Additionally, dividend distributions are often taxable events in the year they are paid, creating drag on your compounding curve. Utilizing a total return strategy allows you to control the timing of your tax liabilities by selling assets systematically as needed.