Many retirees love dividend stocks for the income. They’re often seen as “defensive” — the kind of holdings that hold up better during market downturns.

But here’s the problem: a dividend isn’t free money.

Let’s break down how companies typically use free cash flow:
1. Invest in growth opportunities
2. Buy back stock to improve performance metrics
3. Pay a dividend — usually because they don’t see a better use for the money

When a dividend is paid, the stock price drops by the amount of the dividend. In other words, it’s not extra income — it’s your own capital being returned. And many dividend-heavy “value” stocks underperform the S&P by about 10 percentage points a year.

Compare that to the Stars model, which has historically outperformed the S&P by 19 percentage points. The lost opportunity cost of holding dividend stocks instead? About 29% per year.

If you need income in retirement, a better strategy is to sell a small percentage of your portfolio (say, 5%) each year. You pay capital gains tax on the sale — and if your portfolio is still outperforming the S&P by 19 points, you’re netting about 18 percentage points above the S&P after withdrawals.

In short: dividends aren’t the magic income stream they’re made out to be. The real goal should be maximizing total return.