Dividends and Investors (Part 3)

Are you a chicken farmer, or an egg farmer?

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 is hopelessly biased against the egg farmer. Every day they report market prices and how they’ve changed. But they almost never report on dividends. This bias causes income-oriented egg-farmer investors to forget who they are and believe that they are chicken farmers. Since they’re confused, they often have a hard time achieving their objectives.

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.

Both types of portfolios need management, 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 dividends. Egg farmers like bear markets, because when the market falls they can adjust their portfolios and not pay taxes. By contrast, chicken farmers hate bear markets.

Both approaches are valid; they meet fundamentally different needs. So you never have to ask which comes first.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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