Chickens or eggs?
- Mike Brown
- Aug 7, 2024
- 3 min read
“I can’t figure out how you do it,” said the young chicken farmer to his older and more prosperous neighbor. “I buy a hundred hens and before you know it, chicken prices drop, and I have to sell all of them at a loss just to pay my bills. And by the time I can afford to buy again, prices are sky-high!”
“Chicken prices can be pretty volatile,” answered the old farmer.
“So how do you manage to keep making more money every year in the chicken business?” the young farmer begged. “What’s your secret?”
“I’m not in the chicken business,” the old farmer replied with smile. “I sell the eggs.”
Hold that thought for a moment as you consider the following:
Given current estimates of life expectancy, we have to assume that you are going to be living in retirement for a very long time.
The things you buy are going to get more expensive in the future. If inflation averages just 3% annually going forward, it will take $2.44 in the 30th year of your retirement to buy what $1.00 bought in the first year. That means unless your income more than doubles over that time, you’ll be eating into your principal at some point. And that strategy doesn’t typically end well.
Retirement planning is therefore an income problem. To solve it we need investments that pay us a regular income that rises over time, at least as fast as what it costs us to live.
Retirees looking for income naturally turn first to fixed-income investments, such as CDs or bonds. But by definition, income that is fixed doesn’t increase over time. Trying to cover rising expenses with a fixed income probably won’t cut it for very long.
Stock dividends, on the other hand, have risen consistently for decades. In the 78 calendar years since World War II (1946-2023), S&P 500 dividends increased in 68 years, or about 87% of the time.
More importantly, stock dividends have consistently outpaced inflation. The cost of living (Consumer Price Index) is nearly 17 times what it was at the end of 1945. S&P 500 dividends over the same period have increased more than 100-fold. (Source: Robert Shiller, Yale University)
So as a long-term producer of income that rises faster than inflation, equities have historically fit the bill. But aren’t stocks risky, especially for investors in retirement?
If day-to-day volatility and uncertainty are how you define risk, then equities would certainly be considered riskier than bonds over short time periods. But if your definition includes the possibility of watching your purchasing power erode over the rest of your life, then you might reach the opposite conclusion, just as Wharton Professor Jeremy Siegel did in his 1994 classic Stocks for the Long Run:
“Although it might appear to be riskier to hold stocks than bonds, precisely the opposite is true: the safest long-term investment for the preservation of purchasing power has clearly been stocks, not bonds.”
Warren Buffett said essentially the same thing in his 2014 letter to shareholders:
“The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities – Treasuries, for example – whose values have been tied to American currency.”
During your working years it’s all about making your money grow, but in retirement it’s all about making that money last. Spending dividends that have historically increased faster than the cost of living is clearly a strategy retirees should consider, while fixed-income investments might be a better choice for shorter-term spending needs. As I’m fond of reminding our clients, stocks are no place for the rent money, but over the long run, equities have proven superior, not only for capital appreciation but for income and preserving purchasing power as well.
That old farmer was right. If your hens lay enough eggs, and those eggs increase in number most years, then before long chicken prices don’t seem to matter much at all.
Any opinions are those of the author and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided will prove to be correct. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Dividends are not guaranteed and must be authorized by the company’s board of directors. Past performance is no guarantee of future results. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
