Are you a chicken farmer, or an egg farmer?
Photo: Ilona Couleur. Source: Pixabay
Chicken farmers raise chickens for their meat. Egg farmers raise chickens for what they lay. Investors who plan to sell their stocks to pay for college or to buy a second home are chicken farmers. Investors who hope to use the income from their investments are egg farmers.
The financial press doesn’t understand egg farmers. Every day they report market prices and how they’ve changed. But they almost never report on dividends. This bias sometimes causes income-oriented egg-farmer investors to forget who they are and believe that they are chicken farmers. If they get confused, they may have a hard time reaching their goals.
Prices are volatile. If you’re a chicken farmer, when you buy, and especially, when you sell, is extremely important. A chicken farmer needs to watch the market like a hawk. But if you’re an egg farmer, the most striking aspect of dividend payments is how boring they are. They just don’t jump around very much.
Photo: Marcel Langthim. Source: Pixabay
Both kinds of portfolios need oversight, but managing a dividend stream is different. Risk doesn’t come from market swings, but from factors that endanger a company’s ability to earn profits and pay investors. Egg farmers like bear markets, especially bear markets that don’t threaten corporate revenues. When the market falls, investors can adjust their portfolios without taking gains and paying taxes. By contrast, chicken farmers hate it when prices fall. But chicken farmers love mergers and acquisitions. The buyer almost always has to pay a premium. But for egg farmers, takeovers just complicate things. Acquirers—especially serial acquirers–usually aren’t as generous with their dividends.
Both approaches are valid, but they meet fundamentally different needs. So you never have to ask which comes first.
Douglas R. Tengdin, CFA
Chief Investment Officer