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