Growing Your Retirement Income in a Down Market with Dividends Live Stream Recap
This week we’re doing a recap on last weeks live stream with Troy, Charles and myself, Chris Perras. We talked about growing Your Retirement Income During a Market Downturn with Dividends. In this episode we summarize the video and talk about the highlights.
Chris: Hey, I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group in Houston, Texas. This is our weekly Stock Talk Podcast, keeping you connected to your money. Folks, I don’t have a script this week. Last week, we did a live stream. It was Troy, myself, and Charles Scavone, and we covered dividend stocks and how they can be implemented in a retirement plan. We delved into a lot of areas. Troy hit the retirement planning side of dividend stocks and taxes. That was really interesting how you can actually hit very high levels of income and not pay any capital gains tax or income tax if you plan it right. You should check out the video, look for Troy’s segment.
Charles and I covered a lot on historically how dividend stocks act in different economic environments, how growth stocks act in different economic environments. I talked a lot about how there’s this broad notion that dividend stocks are all the same. They aren’t. The group here at Oak Harvest on the investment side, we try to look for dividend stocks that can increase their dividends gradually over time. We call them dividend growth stocks. A lot of people call them Dividend Aristocrats, depending on how long they’re increasing their dividends.
We looked at those versus a lot of the high dividend yielders. Those are the dividend stocks that pay maybe 6%, 7%, 10% dividends, but over time, their stocks actually decline. You’re getting this dividend stream, and it’s a false sense of security because in any given year, sometimes they’ll cut their dividends and the stock will be down almost 50%. The example I gave was Intel. Intel is a stock that almost everyone is aware of, a semiconductor company. It’s a great company. We’re not talking about bad companies. We’re talking about bad stocks and there’s a big difference.
We have nothing against the Intels of this world or the AT&Ts of this world and the people who work for them. Nothing at all. We’re talking about the difference between a stock and a company. There’s good companies and good stocks, there’s good companies and bad stocks, there’re bad companies and bad stocks. We’re trying to filter all of these things out and we’re trying to come up with good companies, good stocks that can gradually compound your money, both from a capital appreciation standpoint and from a dividend compounding standpoint.
I compared two stocks, and we got actually a lot of questions about this. I’m going to provide here a chart up here above me, it shows Intel versus Texas Instruments since the .com bubble, almost 22, 23 years ago. You’ll see here, you got dividends and income and you got capital appreciation in both Intel and Texas Instruments. We’re comparing them and we’re comparing them against the S&P 500. What you’ll see over 22 plus years, the total return of Intel over 20 to 22 years has been zero. That’s a combination of a decline in the stock and a rise in dividends, but even so the total return over all that time period has been zero, that’s as compared to Texas Instruments which also operates in the semiconductor business, which has a total return of over 300%.
Now, that’s a combination of the stock rising, that’s capital appreciation and dividends compounding. That’s them raising their dividend gradually every year. Now, that’s compared to the S&P 500 which is appreciated over 200% from a capital appreciation standpoint and a dividend compounding appreciation standpoint as well. Don’t forget, these indexes, even though the dividend is small right now under 2%, if you take the dividend in the S&P 500 and reinvest it in the S&P 500, over time the stock market has proven to compound your money between 7% and 9%. Reinvesting these dividends even in an index fund has proved to be a very positive strategy for your investment outcomes over long periods of time. We’re talking 5, 10, 15 years, not 5, 10, 15 days, months, weeks, very short-term period. That’s not an investment strategy, that’s trading.
I want everyone out there, take a look at our webcast or livestream from last week. It’s pretty long. It’s about an hour, but you can fast-forward through different segments.
You can see Troy talk about retirement income. You can see Charles and I focus on the dividend stocks. One of the big points I make during the video is to compare dividend stocks versus bonds, and there’s a big difference. Dividends are not guaranteed. They’re not a contract between the company and yourself. At any given time, the company, like Intel did a couple of weeks ago, their board of directors can meet with management and say, “Hey, we don’t have enough cash, we’re going to cut the dividend which is what Intel did, and they took their dividend down by almost 75%. They cut their dividend back to where it was about 15 years ago, and they did that in one day. The stock had dropped last year about 50%, and it was showing a dividend of about 5.5%.
They cut that all the way back to about 1.5%. There is no contract between you and the company that these companies continue to pay the dividend. That’s different than you owning a bond. You owning a bond in Intel or a bond in Texas Instrument, or someone else, that is a contract between you and the company. You’ve lent the company money. There’s a contract between you and them, that they pay you the money back. Over time, if that doesn’t happen, there can be lawsuits outstanding. You actually have a claim if the company goes in bankruptcy, that’s above the equity holder if you own a bond. If there was a liquidation, you would get your money before the equity holder would.
Just remember though, dividends aren’t guarantees. We’re looking here at Oak Harvest, we’re doing fundamental research. Charles, myself, James, the team, we’re doing fundamental research to look at the company’s income statement. Look– at the company’s cash flow and balance sheet to see if the dividend they’re paying you is sustainable. Intels run into problems because they’re trying to expand the number of fabs they have.
The CEOs’s been on TV a lot talking about the money they’re going to get from the Inflation Reduction Act and wanting $20 or $30 billion to help build fabs. That’s because those fabs cost a lot of money, and so they’re having to put all this cash out to build a factory. At the same time, they were trying to hand shareholders a dividend. They got into a crunch and they said, “Our business isn’t that great. We want to keep building fabs. We’re going to cut the dividend for shareholders.” Hopefully down the road, the returns on these new fabs generate cash and they can actually start raising their dividend again.
There is no contract between you and the company that they have to pay you the dividend. We’re doing fundamental research here at Oak Harvest. We’re listening to conference calls. That’s why we don’t have really a new segment this week. Charles, myself, and James have been listening to all the earnings calls. The last couple of weeks been very busy, listening to anywhere between two and five calls per day, trying to see what managements are saying about business, how things look for the next six months to a year out there in the economy in these industries, like semiconductors, technology, healthcare, all the different areas that we invest.
I know that’s a little bit of a ramble today, but I want you to go out there if you have a chance. Take a look at our live stream. It’s about an hour. Here’s the link up here over my shoulder. Go back and take a look at the chart that I’ve provided on Texas Instruments and Intel, and the difference in the returns over the last 20-plus years. How one was able to compound your money from a capital appreciation and dividend basis combined, the other one stagnated for almost 20 plus years, providing you little to no return. We’re trying to focus on the companies that actually can do that compounding, looking for dividend growers, dividend stocks that yield 2% to 4%, but then can compound it, raise your dividend, I don’t know, 5%, 6%, 7% a year.
You’re getting a little capital appreciation on the stock, and they’re going to get the compounding of the dividend over time. From myself, from James, from Troy, from Charles, and Jessica, the whole team behind the scenes, have a blessed weekend. When you get a chance, check out the live stream right here. It’s about an hour long. There’s some great content. Click on the link [unintelligible 00:08:18], and get a chance.
CFA®, CLU®, ChFC®
Chief Investment Officer, Financial Advisor
Chris is a seasoned investment professional with over 25 years of experience working with some of the most successful money management firms in the world. Chris has made it a point in his career to adapt as the market landscape changes, seeking to utilize the appropriate investment strategy for a given market environment. His transition from managing billions of dollars at the institutional level to helping individuals and families retire is guided by a desire to see first-hand the impact he is making in the lives of clients at Oak Harvest.