In this month’s edition of “Money Matters,” Scott discusses stock dividends and the tax implications of the recently passed Secure Act 2.0.

Money Matters: Secure Act 2.0 & Stock Dividends Transcript

0:00:00.0 CJ: WTIP is pleased to bring you another edition of Money Matters, a monthly feature intended to help us understand more about managing our finances. Scott Oeth is a certified financial planner and adjunct professor. He works with many individuals and has taught retirement planning and wealth management strategies to hundreds of financial professionals, and he's joining us now by phone. Good morning, Scott.

0:00:24.5 Scott Oeth: Good morning, CJ.

0:00:28.6 CJ: Nice to talk with you again. So, you said you wanted to talk to us about dividends this morning. So, can we start with the very, very basics like what are they? And why they're important?

0:00:38.4 SO: Absolutely, yeah. So, a dividend is when you own shares of company stock, you might get a check in the mail periodically, and what that is, is the company board of directors is taking a look at the earnings of the company and saying, "There's excess earnings that we don't need." And they want to return it to shareholders as a reward for part of their equity position. So, it can be cash, sometimes it's actually additional shares of stock. So, this has gone on for a long time and a lot of companies have it as part of their policy, part of their tradition that this is what it's about, owning the company, you get a dividend return of earnings to use for being an owner in the company. Not all companies pay dividends. There's a whole lot of companies out there, CJ, where they take those extra earnings and they're constantly ploughing those back into hiring more people or opening new plants or into research and development, and in fact, they're even borrowing money to grow and put more into that.

0:01:35.7 SO: So, it's common, with some more established companies, typically but younger growing companies often do not pay dividends, but I think about it this way, CJ, I don't know if you've ever been in a work environment or maybe involved in an organization, maybe there's someone who's flashy and draws a lot of attention and gets a lot of notoriety. But then in that office, there might also be a quieter, more reserved worker, but someone who is a super strong performer and just consistently keeps getting work done. And that's kind of how I think about the difference between dividends, which have been out of favor. We haven't heard much about them in the last few years because capital appreciation, the idea that you buy a stock for $100 and it pops up to $125 or $150 or whatever it is, that's what captures the headlines. That's the exciting stuff that you see in the nightly news, and you hear the buzz from your friends that they bought something that went up in value, that's capital appreciation, and that tends to be the flashy stuff that really catches attention.

0:02:37.6 SO: But with 2022 being a rough year and markets down, attention has come back around to dividends and saying that, "Yeah, there's other ways of making money." So, you're going to talk about a few things about dividends, dividends investing. As always, CJ recommend that people seek their own advice, do their own research. It's just general information we're sharing here on investing, but dividends tend to be de-emphasized in times like the late 1990s, when we had the dot-com stocks building up, no one was talking about dividends. They want to know what you could buy and see your money double in a year, but once that bubble burst, all of a sudden people went back to dividends. And after years like 2019, 2020, 2021, we had some depths, but boy, those end up being really strong years.

0:03:25.9 SO: We've had a tough one. Dividends are now back in the news. And what we see is that dividends tend to play a very strong role in the contribution of total return during decades like the 1940s, in the 1960s, the 1970s. Decades where the total stock market return was less than 10%, and there's some really amazing statistics as to why you don't want to overlook this as part of your long-term game plan. Hartford Investments has put together numbers to say, "If you go back to 1960, 84% of the total return of the S&P 500 can be attributed to reinvesting dividends and the power of compounding." And Thornburg Investments goes back even further and say since 1900, so 120 something years, dividends have accounted for approximately 45% of the total return of the S&P 500. So, if someone is only focused on the flashy exciting growth stocks, yeah, they do very well at times, but over the long haul, you might be missing out on really serious components of returns, especially during decades or time periods that might not be as strong in the market.

0:04:38.5 CJ: Alright, so it sounds like we should be seeking out dividend paying stocks to own in our accounts, right?

0:04:45.5 SO: Well, CJ, so like so many things in life, I'd say it depends. Or maybe in moderation, all good things in moderation. So, dividends could certainly play an important role in the portfolio, and they may be especially attractive for retirees, folks who are looking to develop a consistent income stream from their accounts. But purely focusing on dividends, what could happen is it can lead to a real concentration your portfolio in certain industries or certain market sectors, where you have companies that tend to pay out higher dividends and it can look good for a while until that industry, there's a larger business trend or economic trend that causes trouble and those prices can really fall. And here's kind of a trap, which you catch right away is you'll see dividends quoted for a company as a dividend payout yield. So, 3%, 5%, 6%. And what that is, is they looking at the dividend divided by the stock price. So, a strong and healthy growing dividend can make that number higher, but you’ve got to watch out because also a decline in stock price, the denominator in that ratio could also make that dividend payout ratio look higher.

0:05:54.9 SO: And there's a lot of formerly great dividend paying companies, some of the former champions of business, household names of our youth that are not even in business today. So, we need to be careful about that risk of over-concentration. And I think the other big thing is just what economists call, what we like to call financial advisors, we talk about opportunity cost, and that is the cost of missing other potential opportunities. What else could you do with your money? And I think one way to think about this, CJ, is there are seasons in the market, just like there's... The weather changes and we know, at some point, spring is going to come in to warm us up. And while I'm a fan of dividends, and without a doubt, there are also seasons for owning those growth stocks where they are not paying dividends, but the wind will hit the sales and they'll have tremendous performance. So, the portfolios I manage, my approach is I'm looking at a total return approach where we're looking to capture that capital appreciation that happens during the hot bull market runs, interest income from bonds, and also a healthy flow of dividends from stocks in the portfolio. More of an all season and all-weather approach.

0:07:04.6 CJ: So, I have a question that sort of triggered for me. So, these companies that pay out dividends, when you go to sell that stock, do you generally get less for that than those flashier capital investment ones?

0:07:18.0 SO: Yeah, it depends, CJ. I think that's the general idea, is the flashy companies, that are the growth companies, they may have popped more in price, but it really depends on when you're looking at it. There are... And you and I have had a number of conversations in the past about being cautious about the speculative type pf securities or looking at valuations, and there are a number of companies, I'm not supposed to mention specific names in this format, but some of the high flyers, the biggest names in our industry, the big tech companies, the ones we don't know about, some of them lost half their value last year. I can think one instance where company lost a quarter of its value in one day twice last year, so it depends on the selling point, and if you look at very long-term grid, some of those dividend payers, if you were re-investing the dividends, would have built up phenomenal gains when you went to sell them. But yeah, I think you might generally think that they're more the ones that are consistently delivering that money to your mailbox on a regular basis, rather than seeing the large jump in price over time.

0:08:29.3 CJ: Okay, alright. So, we've talked about stock dividends. You also said that there's a new tax law that's worth talking about. Can you tell us about that?

0:08:38.8 SO: Yes, so I want to touch on this quickly, just to give people a notice. Something they might want to look into. The end of December, a huge tax bill was passed, $1.7 trillion, called Securing a Strong Retirement Act 2022, what we are hearing people referred to it as the Secure 2.0 Act. The Secure Act passed a couple of years ago, and it has a lot to do. There's a lot of stuff in here, CJ, but it's large about retirement and investment, and there's a whole lot of provisions, there's no way we can cover them all. But a couple of major themes that I think people might want to take a look at, there's a number of provisions that are going to allow investors to save more for retirement and to save longer, pushing out required minimum distribution ages, increased catch-up contributions for people saving for retirement. Indexing on some of the dollar amounts that are in there. Roth tax treatment, so we've talked about things like Roth conversions. Investors tend to love Roth treatment, which means you're putting in after tax dollars and they get to grow tax deferred, and all the gains come out tax free. So, investors love that.

0:09:49.9 SO: It turns out our government actually likes it, too, because it means they're getting paid up front on the money that goes into those plans, and they need money in the treasury checkbook right now. So, it's a number of interesting additions to Roth treatment, like SIMPLE and SEP IRA have been added Roth options, and you can roll some amount of old 529 college savings plans into Roth IRAS, which is really interesting, and no more requirement minimum distribution from employer Roth account. So, there's a whole lot in here, CJ. I'd encourage people to take a look at it and say, "Hey, what applies to me? Is there something that should change planning strategy or how I'm thinking about things?" I will say, my wealth strategy team at the office, we're going to do a webinar, on this on the 15th at noon on the Secure 2.0 Act. Happy to have any listeners join in if they'd like, just send me an email and we'll be taking a deeper dive over course of an hour and even that, I think we'll barely scratch the surface, but we'll definitely provide some reference material with that as well.

0:10:53.7 CJ: So that's February 15th at noon, you said?

0:10:57.1 SO: February 15th at noon. Absolutely. We'll be hosting a webinar on that, talking about Secure Act 2.0. We also recently did, I guess I should mention, on dividend investing and specially using dividends in a retirement income strategy called the endowment spending model, and we've got a recording of that if anyone's interested, I guess that relates to this point.

0:11:16.6 CJ: Can you give me your email address, Scott? If people wanted attend that whether or not?

0:11:21.4 SO: Yeah, absolutely. Yeah, it's... So maybe the easiest way to find me is you can go to my blog, which is scottoeth.com, O-E-T-H.com and I think you may have that linked on the WTIP site and you can contact me there. My email at the office is scott@cahillfa.com. So, it's C-A-H-I-L-L-F-A.com.

0:11:45.5 CJ: Alright, anything else you'd like to mention today, Scott? We've covered a lot, but that was awesome. That's awesome.

0:11:54.0 SO: It is a lot, and I always enjoy this conversation, CJ. It's fun, and I do have a lot of supporting materials for the things we've talked about, so I enjoy hearing from people after these episodes. I've had some fun conversations, interactions. So, if it's raising questions, feel free to reach out and happy to talk further.

0:12:14.1 CJ: Alright, thank you so much for your time today, Scott.

0:12:17.6 SO: Thank you, CJ.

0:12:18.3 CJ: Alright, goodbye.

0:12:18.8 SO: Have a good morning.