The Dividend Misconception Costs Retirement Investors Their Principal

Retirement investors drawing income from dividend ETFs like the iShares Select Dividend ETF believe their principal remains untouched while they draw down their base. This occurs because a company's assets decline by the amount it pays out as a dividend. On the ex-dividend date, the stock price adjusts downward by the dividend amount. Dividends represent a reallocation of value from the fund holdings to the investor rather than additive income. A $100 stock paying a $5 dividend becomes a $95 stock plus $5 cash. The iShares Select Dividend ETF, which yields 3.8%, is often used by retirees who treat dividend payments like interest on a savings account. Investors who spend these distributions while assuming their portfolio value is unchanged are slowly drawing down their base.