We would like to thank all who attended our webinar on High-Income Stocks & Retirement Planning and wanted to offer a follow-up for questions during the Q&A session we were unable to get to in the allotted time.
In case you missed the webinar, a complete replay is available for Members and Clients in the Special Reports section of the Member Portal.
Question: Alphabet (Google) isn’t a dividend stock. Do you have plans to lighten up on it, or sell it, in near future?
Answer: Indeed, Alphabet (GOOG) does not pay a dividend, but the company has been active with its share repurchase program and the cash on hand ($111 billion on 12.31.2023) provides lots of financial flexibility. We think Alphabet will opt to pay a dividend at some point, although we have no idea about timing and caution that the amount could be trivial in the early years. Overall, we think the lack of a yield is not a reason to steer away from the advertising and search engine giant, given the dividend emphasis across the rest of our currently open stocks and the solid total return for Alphabet since we first recommended it in April 2018. Our Target Price is well above the current market price so no plans to trim any at this point, even as the weighting in our portfolios is relatively large.
Question: Regarding portfolio withdrawals in retirement, what if you are in retirement and are at an age where your time horizon is as long as some market crashes?
Answer: Note that the scary stories of it taking a decade a longer to get even from a market decline are not factually correct when considering the total return on stocks. Yes, history is filled with many disconcerting corrections and even frightening Bear Markets, but these setbacks have always been overcome in relatively short order, again when considering total return.
Of course, one must have the stomach and financial wherewithal to ride through the downturns and patiently await the recoveries, which is why we believe financial planning is important in helping to avoid an outcome in which a market plunge impairs one’s wealth enough to adversely impact their retirement plans. This tends to happen when the investor’s time horizon and risk tolerance necessitate a lower risk profile, but the allocation is not adjusted accordingly. We’ve long reminded readers and clients of the importance of diversification, and through The Prudent Speculator’s union with Kovitz in 2018, we were able to significantly widen the opportunity set when it comes to asset class diversification. Every situation is unique and folks interested in learning more about all of the arrows in our quiver, please email Jason R. Clark, CFA at jclark@kovitz.com.
Question: Berkshire Hathaway does not pay dividends and therefore shareholders don’t get dinged with income taxes on dividends paid by the company. Apart from the regularity of dividend payments that many shareholders require, is a company better off not to pay dividends to defer/avoid tax.
Answer: It depends. While we generally think that dividend payments are a sign of a healthy company, we note that stock buybacks are another method of returning capital to shareholders, and we always prefer that management teams make significant investments in order to ensure the long-term growth of their businesses. There can also be temporary situations that arise where not paying a dividend is preferable to paying one. For example, in the early innings of the pandemic, many companies whacked their dividend payments as management teams became concerned that global disruption could adversely impact their businesses. Some reinstated their dividends quickly, while others like Disney (DIS) have waited years to restore their payouts. Of course, yields are important to folks dependent on their portfolios for income, but they are just one factor that we consider for inclusion in our Recommended List.
Question: Do you use the same parameters for all stocks to decide if a stock is a Value Stock?
Answer: We have a three-pronged approach to our investment universe. The first prong is a daily quantitative review of nearly 3,000 stocks. We utilize a wide range of factors to compare stocks, both on a universe-wide basis and against peer groups. The next prong is a deeper quantitative review of financial strength and earnings quality, as well as a higher-level qualitative review for aspects like intellectual property, competitive positioning and product quality. The last step pulls together qualitative and quantitative factors to form projections to set our initial long-term Target Prices. There are many common factors we utilize to review the companies in our universe, however, we think it’s important that each stock gets its own unique analysis when under the microscope.
Question: Am I correct that a plus of the TPS approach versus index investing is buying at a lower entry price? The idea would be that a better entry point achieves more over time.
Answer: We believe there are many benefits to building a portfolio of individual stocks over index investing. A customized portfolio is tailored to your individual situation and allows you to configure broad diversification in a way that aligns with your tax situation, investment goals, risk tolerance and personal preferences. In addition, we find that many index funds are not as diversified as they appear to be. For example, the S&P 500 index spans 500 companies in all 11 GICS sectors and at face value would appear more diversified than the 70-90 stocks held in the TPS Portfolio. However, nearly one third of the index is represented by just 7 companies, mostly in the Information Technology sector (or leaning that way in some form). While the concentration has worked out well lately, we think it could be problematic over long periods of time, particularly for those who hold several index funds with significant overlap in their largest holdings. Whether one chooses to use index funds or a customized portfolio, we think it’s important to note that time in the market beats market timing, and we believe a large part of The Prudent Speculator and the service we provide to clients is the steady hand that keeps investors on the path to achieving their long-term objectives. Emotions can quickly derail well-laid plans and our long-term perspective paired with more than four decades of experience through a variety of market environments lends credibility to our approach.
Question: What is your perspective on commodity stocks, particularly metals?
Answer: When it comes to commodity stocks, whether from the Energy or Materials sectors, we prefer to own the producer rather than the commodity itself. We believe there’s additional upside potential from operational performance and profitability factors, and we are often rewarded with generous dividend payouts not available on the commodities themselves, rather than winning or losing simply due to price changes.
Question: How would you build a portfolio using this service? Are all your positions equal weighted to start?
Answer: We equally weight our portfolios to start (usually around 1.2%), but the weights are not precisely equal for a variety of reasons. A body of empirical data, plus our own number-crunching, shows that equally weighted portfolio outperform market capitalization-weighted portfolios over longer periods of time and we believe that the additional risk from heavy concentration in certain areas is not helpful.
Question: I’d like to point out that [the industry rule of thumb] 4% withdrawal rate does not consider the escalating required withdrawal rate required to meet the government’s minimum distributions requirements.
Answer: This is a fair observation, although we note that individual circumstances vary dramatically. We believe financial and retirement planning is the best place to start when attempting to solve this question, with portfolio structure, market conditions and ongoing maintenance required to ensure distributions are optimized. We also note that many investors have taxable assets as well as those that are tax-deferred as part of their overall allocation, so they may not have to withdraw 4%+ of the overall pie, while there is no requirement that they not reinvest RMDs in taxable assets.
Question: Later in life, required minimum distributions (RMDs) may require you withdraw more than 4% of your portfolio. What should I do with the surplus?
Answer: There are several options when it comes to surplus funds, all of which are highly dependent on your individual situation. A small sample of possibilities include: 1) reinvest into a taxable account, 2) adjust your overall investment portfolio to ensure it’s meeting your needs, 3) donate to charity, 4) optimize withdrawals by considering all of your retirement income sources and 5) consider a Roth IRA conversion.
