Weekend Reading: Money Makes Money (Sort Of) Edition
I read a Globe and Mail piece by RBC senior portfolio manager Nancy Woods this week, one of those “investing basics” explainers aimed at people just getting started.
The hook was a herd-of-cows analogy: your money is the herd, dividends are the milk, price appreciation is the baby cows (the herd growing over time). The more cows you have, the more milk, the more calves, and so on.
Woods concludes: “Money makes money.” It's a folksy and memorable framing, but it's wrong in at least one critical way.
The analogy frames dividends as something a company produces for you, like actual milk from an actual cow. But that's not how dividends work. Dividends aren't milk. It's just moving money from one pocket to another.
When a company pays a $1 dividend, the share price drops by approximately $1 on the ex-dividend date. This isn't a coincidence or a market quirk, it's basic arithmetic:
The company just sent cash out the door, so it's worth less. You now have a slightly smaller investment and a bit of cash in your hand, with a net change in wealth of zero, except now you owe tax on that cash (if held in a taxable account).
The cow didn't produce milk out of thin air. She just transferred some of her own body weight into a bucket.
So what is the analogy actually describing?
Total return, which is the combination of price appreciation and income. And total return doesn't care whether your gains come as dividends or share price growth.
A stock that pays no dividend but grows 8% annually gives you the same outcome as one that pays a 3% dividend and grows 5%, before tax.
In fact, you come out ahead with the non-dividend payer because you control when you realize the gain, a concept economists call a “homemade dividend.”
If you need income, sell a few shares. You end up in the same place as the dividend investor, but on your own schedule and with potentially better tax outcomes.
The real insight buried in here
Woods isn't entirely wrong, she's just wrong about the mechanism. The genuine principle underneath the cow analogy is that you shouldn't erode your capital base faster than your portfolio is growing. That's true whether you're spending dividends or selling shares.
Where the analogy misleads people is in suggesting that dividend-paying stocks are inherently safer or more productive than growth stocks, when in reality a company paying a generous dividend isn't giving you anything extra.
The company is simply paying out a portion of its earnings as cash instead of reinvesting them, and you're paying tax on it (if held in a taxable account) whether you needed the money or not.
None of this is to say that Woods is wrong to encourage people to start investing, and using a relatable analogy to get someone off the sidelines is a worthy goal. But oversimplified mental models have a way of hardening into dogma.
The dividend investing community is full of people who treat dividend income as “free” money, like eggs from a chicken or milk from a cow, while viewing their principal as something sacred and untouchable.
In reality, a dollar of dividends and a dollar of capital gains are the same dollar, just arriving by different routes and often with different tax consequences.
When investors lose sight of that, they can end up chasing yield, overweighting income-heavy sectors, and ignoring total return, all because a metaphor made dividends feel like free money.
The cows aren't sacred, and the milk isn't magic. They work together as part of your total return.
This Week's Recap:
I'm officially a British citizen with a British passport! That's good news and good timing, because due to the UK's ETA system rollout British citizens can no longer use foreign passports to enter the UK – and we have a trip to Scotland booked for early July.
Earlier I explained how to do a better job estimating your taxes so you're not surprised at tax time.
And then I opened up the “Money Bag” to answer your questions about CAGE, cash wedges, and net worth calculations.
Weekend Reading:
Why the years just before and after retirement are especially vulnerable, and what investors can do to reduce sequence‑of‑returns risk.
For some retirees, underspending their retirement savings is a bigger problem than overspending. 100% agree.
Anita Bruinsma shares the five golden rules for investing.
Nick Maggiulli explains why survival is the only success:
“It doesn’t matter what you do in life if you can’t sustain it. You could make $100 million, but if you end up in a prison cell or broke, who cares? That’s not success. In fact, it’s the opposite.”
Here's Jason Heath on why retirees are often shocked by tax bills and how to reduce them.
The most important video Ben Felix will ever make: Using your money to be happier:
Want to be a landlord? Make sure you know the tax rules.
When Canadians lose a parent from afar, managing the estate can get complicated.
Here's what you need to know before passing property to your adult children:
“The biggest mistake families make is focusing on saving a few thousand dollars in probate fees while accidentally creating tens of thousands in tax and legal problems and potential family issues.”
Finally, what’s the ideal age to downsize? Wait too long and ‘your doctor, your lawyer or your kids’ will decide.
Have a great weekend, everyone!
