Which Comes First?

Are you a chicken farmer or an egg farmer?

People who raise chickens do it for two reasons. They either raise them for the eggs, or they raise them for their meat. Broilers grow pretty quickly, and then they’re harvested – usually in about 8 weeks. Layers take longer to mature. They usually don’t begin laying until they’re at least 6 months old, and they can take up to a year. Commercial farms manipulate the light in their poultry barns to mimic the summer day-length, but left grow on their own, layers produce eggs for a few years.

Investors can be like chicken farmers or egg farmers. If plan to sell your investments to pay for college or to buy a house, you’re a chicken farmer. If you want to live on the income that your investments produce, you’re an egg farmer. The financial news mainly caters to meat farmers. They report on stock prices as if that’s all that matters. They almost never report on dividends.

By contrast, egg farmers don’t really care about the price of their stocks. The most striking aspect of dividends – what egg farmers depend upon – is how boring they are. Companies typically increase their dividends or keep them stable, unless there is some sort of corporate disaster brewing, either a major economic downturn or a significant business miscalculation.

Ham and eggs. Photo: Amin Eftegarie. Source: Wikimedia

Both types of portfolios need management, but tending to a dividend stream is different than managing a growth portfolio. Risk doesn’t come from market swings, but from fundamental issues that might endanger a company’s ability to earn profits and pay investors. Egg farmers don’t mind bear markets, especially technical bear markets that leave corporate revenues alone. When the market falls, investors can rebalance their portfolios without taking gains and paying taxes.

By contrast, chicken farmers hate it when prices fall. And chicken farmers love mergers and acquisitions. The buyer almost always has to pay a premium. But for egg farmers, takeovers just complicate issues. The proceeds have to be reinvested, and acquirers – especially regular acquirers – are rarely very generous with their dividends.

Both chicken farming and egg farming have their place, but they serve fundamentally different needs. Which comes first for you?

Douglas R. Tengdin, CFA

By | 2018-03-28T06:37:36+00:00 March 28th, 2018|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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