During the early summer months, my wife planted lettuce in our garden. After it came up, we were able to enjoy lettuce salads every few days from the lettuce in the garden. Eventually they were removed to make room for seeds for a different vegetable.
The Lettuce Plant
The lettuce plant is an interesting one. The seeds are so small and yet grow to a nice-sized plant. It first puts out a few leaves and then more and larger. At some point, it is large enough to harvest and so my wife cuts off some of the leaves for salads.
If she cuts too few, then the plant will grow more mature and the leaves won’t be very tasty. But if she cuts too many, the remaining leaves don’t provide enough nourishment to maintain the plant and it dies. However, if she cuts off the right amount, we can continue to take a few leaves every so often for a number of weeks while maintaining a healthy plant.
At the end of the season, when the weather grows too hot, she harvests what is left of the lettuce and pulls the stem and roots to make room for the green beans going in next.
The Picking Analogy
As I was enjoying a salad one day, I realized that this process matches up quite well with the concept of investing in a stock – particularly one that pays a dividend. Let me connect the dots between these two disparate subjects.
When lettuce is first planted, you have to let it grow until it has reached a stage where you can harvest leaves without it being harmful to the plant.
In the investing world, that would be like investing in a good high-yielding stock. In the 1960s that would be a stock like IBM or AT&T. Another example would be CSX which I discussed in another blog post. In fact these companies still exist today and still pay dividends (although AT&T has gone through a rough patch). They were good, solid companies that had a price that varied in the short-term but grew over time. Like the lettuce, owning it increased your investment value in the stock over time as well.
When lettuce is in its prime, you can take some leaves regularly and the plant continues to grow and be healthy. Likewise, a stock that pays a dividend will yield a regular stream of income on a regular basis without affecting your holding of the stock itself.
Some But Not Too Much
The key to lettuce harvesting during the season is to take some leaves but not too many. If a good yielding stock is going up in price over time, then it is okay to sell some of it and if you want a little more income than just the amount of the yield. But you don’t want to sell too much or two often as it will affect the amount of your dividend.
When I talk about the analogy, I’m thinking about the fact that the dividend on a stock usually goes up as well as the underlying stock price as well. As the dividend goes up, it is possible to sell just a little bit of your stock and remain at about the same dividend as when you bought it. Of course the analogy breaks down since selling any stock reduces the dividend payout since you are getting a dividend on fewer shares of stock.
When The End Is Near
At the end of the season for lettuce, we harvest the whole plant and enjoy the rest of the leaves in salads for a while. But the garden plot is not left empty. Instead, that space is used and is now replanted with a new vegetable.
Although you want to hold a purchased stock forever, times and companies change, and so sometimes it becomes necessary to harvest all of your gains in a stock by selling it. You might enjoy some of those gains now, such as buying something with a small portion of your gains. But like a garden plot, you don’t want to leave it empty once you’ve harvested. That is the same as selling your stock and not investing in anything else.
Instead, you want to take those gains that you’ve made in your stock and identify a new stock. This new stock should also have the qualities you want. You’ll want another one that pays a good dividend. You want one that has a good history of the underlying stock price going up, as well as the dividend amount going up over time.
The next time you are at the grocery store and come across the heads of lettuce, perhaps pause and think about how that vegetable was grown and how you can do the same with your financial investments.