Barron's Streetwise - Not-At-All-Live Special

Episode Date: March 19, 2021

Jack answers listener questions on dividends, employee stock, and how to prepare for inflation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Calling all sellers, Salesforce is hiring account executives to join us on the cutting edge of technology. Here, innovation isn't a buzzword. It's a way of life. You'll be solving customer challenges faster with agents, winning with purpose, and showing the world what AI was meant to be. Let's create the agent-first future together. Head to salesforce.com slash careers to learn more. Welcome to the Barron Streetwise podcast. I'm Jack Howe, and listening in is our audio producer, Meta. Hi, Meta.

Hey, Jack. This week's episode is a listener question special, and for the first time ever, we're going to be totally live. It's exciting. I'm not sure this qualifies as totally live. Well, I spoke with some listeners and I was live at the time and they were live. And now we're going to play that liveness for the audience. So it's called live on tape.

Well, that's pretty good. Except that it's not really live on tape either because it's called live on tape well that's pretty good except that it's not really live on tape either because it's edited so we're mostly live are we are we lively what would you i gotta tell you i'm at a bit of an emotional crossroads over this. I mean, is it even still a special? Yes, it is. It's a special. I'm back emotionally. This is exciting. Should we bring in our first caller?

Yep. It's Michal who lives in New Jersey where he also studies. I study in BMG. It's a big, well, it's a yeshiva. It's a religious school. We study the Talmud, which is like civil and religious law. Sure.

So Michal sent us a question about dividends, and I would call it a well-rehearsed question. I recorded my listener question 61 times. 61 times? Tell me about numbers 1 through 60, if you could. What happened there? Numbers one through 60, I either ummed too many times or I was figuring my question out. I guess I'm a perfectionist. Well, that's everybody ums and everybody ahs.

I hear that all the time on time. I just did it myself. People giving presentations, people on video calls, everyone ums and ahs because the pauses make people nervous, even though what they don't realize is the pauses aren't so bad. It makes people lean forward in their chair a little bit and listen to what you're going to say next. Better to have a second plug. But look, I admire the dedication. So now I guess it's number 62, right? Because you're going to deliver it live. Okay. The question that I had about dividends was if my intention in investing was just to receive that dividend and I can expect it to be fairly stable and I know what dividend I'm receiving, what yield, can I ignore everything else happening to that stock, all the activity? I get exactly what you're saying. It's a very good question. It's an admirable thing to shoot for, right? You've got a stock, you're going to collect a dividend. And what you're saying is, why should I worry if it goes up a few bucks, if it goes down a few bucks, I have those dividends rolling in, I'm going to hold the stock for a long, long time.

And eventually, the dividends are going to be the important part of this thing, not the short-term fluctuations in the price. I think I'm right there with you. I think that's a good way to think about it with a couple of small caveats. One is, while it's nice to think that we would ignore price movements altogether, sometimes price movements can be a warning of something, right? So if there's a dramatic decline in the stock price, then you just want to ask the question, what's going on here? Is this because the whole market is diving, in which case maybe you're not so concerned? Is it because the company missed numbers or something like that one quarter, but you don't think it's such a problem? In which case, maybe even think about buying more because everyone's overreacting. Right.

Or is there something that's fundamentally changed in the company that might not make it as attractive to you. Especially if we're talking about anything that has to do with financial strength issues that's going to affect that company's ability to continue making those dividend payments. So as long as we're not talking about something like that, then I would say, yeah, more power to you. I would say, not quite ignore price movements, but not be overly concerned about them. And if the stock comes down to a price that's more to your liking, consider it an opportunity to buy more shares at a better price and lock in higher dividend payments going forward. But I think, you know, it sounds to me like you're on the right track. You're a young guy

accumulating shares of stock, accumulating mutual funds, what have you. Basically think about it as buying into a larger and growing stream of dividends that you're going to control throughout your life. And so when you see things that you like and they go down in price, it's just an opportunity for you to continue to grow that stream of income. And as long as you're not buying into companies where there's dividend cuts, while other people are stressed about the stock market going down, you're watching your stream of income. You're saying, hey, my stream of income isn't going down. I'm in okay shape. If anything, maybe let's buy a little more here. Sounds to me like you've got

a good plan. Thank you so much. I started my first stock I bought in my life was April 13th, just this past year. So I'm very new to it. Really? Do you want to tell us what it is or you don't want to say? It was one share of Outfront Media, O-U-T. And they own a lot of the billboards and they're also a REIT. So I bought it for $12.50 and it's up 67%. Of course I sold it. Well, nice job. A lot of times people, their first stock, they'll say like, you know, it's some sort of big name brand company. It's always like Walt Disney or something like that. You know, we bought Disney because we like Mickey Mouse, but you bought a billboard reed, which is interesting to me. Seems like you picked a winner there. So best of luck with

your future investments. And thanks a lot for listening. Thanks for the question. I love the show. I really do. Glad to hear it. And I want to see you one day in your uh forest ranger hat walking around the woods okay noted we'll have to plan that for a future episode meta how do you think this somewhat nearly live episode is going? Listener questions. I mean, that was me chatting with a listener. Is that, uh, are we onto something here? Are we, uh, is this something we're going to continue doing?

Is this a disaster? How's this going? Are you still there, Meta? Okay. Who's next? next up is michelle hi michelle hi how are you today nice to meet you so describe i already have uh what your question was but for the benefit of people who haven't heard it so far um what was the question that you had? Sure. So I work at a large public company where my compensation is a combination of cash, my salary and company stock. And I also participate in my employer's stock purchase program. This program allows employees to set aside up to 10%

of their salary to buy company stock at a small discount to the market price. I have acquired a substantial position in the company I work for, just under 20% of my total investments. And over half of my savings are invested in a 401k target date fund, which is managed by my employer. And I work for a great firm and I believe in our mission and I'm planning on working at this firm another 20 years or until I retire. However, despite my strong conviction, I'm also hesitating to grow my position because my spouse was working at Lehman Brothers when the music stopped and

the impact is not fully behind us. So my question is, what is a prudent amount of my employer's stock to own as part of my portfolio in order to be properly diversified? It's a great question. And your problem, if you want to call it that, is a great problem to have. Two of them, actually. One is you've stashed away enough money to be concerned about diversification, which is a nice problem to have. And just as nice, you like your employer, you like your job, which is a great problem to have because you like it so much, you've been putting some extra money of yours into the company shares. Now you're wondering, you know, how much is the right amount? There is no specific answer that's the answer for everyone. If you had pressed me for a percentage, I would have said 10% and you're at 20. So that doesn't mean that I think that you should go and

dump your stock. But if we're talking about, let's say a small, fast growing company, and you said you're very bullish on the company and how much should I own? I'd say, well, if you think you're going to be right about this fast-growing company over the long term, I mean, the more you have in it, the more benefit is going to flow to you, but also the more risk is going to flow to you if you're wrong. The company that we're talking about is a financial services company. It's a sizable company. And so you wouldn't expect that company to grow like a startup. But that said, your company is one that I certainly respect. I've written positive things about your company.

I think it's a well-managed company. I think you have every reason to be proud to work there. If you have other investments that are managed by your company, that's not necessarily such an overlap of risk. It's more the underlying assets that that money is invested in. Let's just say that for the sake of conversation, let's say that your employer has invested that money and they've put some of it in an S&P 500 fund. Well, it's the 500 underlying companies in the S&P 500 that you have that exposure to for the most part. But there's going to be some overlap there, right? Because your company is big enough that it's in the S&P 500.

That's not such a big exposure. But you mentioned Lehman Brothers, right? This is something that a lot of people miss, I think. A lot of people say, okay, half my employer shares, and that's a certain percentage of my investable assets. But then they neglect a very important exposure, which is their earnings and their livelihood tied to that same company. In a certain sense, you are the portfolio asset, right? Just like we can take your shares and we can talk about what we expect the future

cash flows to be and what we would put as a price on those cash flows today, we can look at you and we could say, here's what we would expect your earnings to be down the road. And here's what we feel like those earnings are worth today if we were to buy them all at once. And that is contingent on and exposed to you working for this company. I have no doubt that you're a treasured worker at your company, but it's just, it's another exposure for just doing the math on how many different kinds of exposures you have. Don't forget that one. So 20% waiting, is that dangerous? Is that an accident waiting to happen? I wouldn't go so far as to say that. I would just call it a very aggressive exposure to your company shares, but you know, given the company, given how you feel, that might be fine. I would not be stepping on the

gas pedal from here to increase that exposure is I guess what I'm telling you. Does that make sense? I think that exposure will increase in dollar terms as I remain at the firm, but I agree. And I've taken my foot off the gas to use your analogy as it relates to my own purchases of the stock. Actually, once I hit the 10% mark. So another route that you might take down the road, if you have choices to invest your money places other than with your employer, or if they can do something like this, there are people out there who do custom indexing, right? Where you can say, hey, I want to track the big index. I believe in passive investing, but I'm already pretty exposed to the financial sector. So can we do the index minus the financial exposure? I mean, you know, that's another alternative for

you down the road. But short of that, I would consider you to be somebody who has heavy exposure to a company that I think we both agree is a quality company. So I wish you the best of luck with it. I talk with people all the time who work long careers at companies and end up with loads of stock. I think you're already asking the right questions and thinking the right thoughts, which is that be bullish, have plenty of exposure, enjoy the fact that you like where you work, but also think about, you know, protecting your portfolio over the long run.

Michelle, it was great to meet you. Thanks so much for listening. My pleasure. Okay, Meta. We've laughed. We've cried. I edited out the crying. Oh, thank you.

I get emotional over dividends sometimes. It's the compounding, I think. We should note that we'll be back next week with a regular episode. And now I understand we have one last listener to hear from. Yep. We have Jack. Hi, how's it going? Hi, Jack. It's Jack Howe from Barron's. How are you? I'm doing very well. Thank you. How are you? Doing all right. You sent in a question from the podcast. Thanks for that. And you're a student at Johns Hopkins? Yes, I'm a senior. Oh, nice. What's it like going to school this year?

Yeah, it's very weird. We've been, well, we were online since last March through this fall. We are kind of in a hybrid model now. So most of my classes are online, but I've won, that means once a week in person. So that's kind of nice just to wrap up my senior year. Yeah. By this time in your senior year, you're supposed to be letting your foot off the gas pedal and enjoying yourself a little bit over there. And you know, are you and the other students still having fun or is it, you know, a somber atmosphere? What's it like there? It's definitely a little bit more somber than I think normally a senior spring would be. We're allowed to have small gatherings, so I'm still allowed to see my good friends around here.

So that's kind of nice, especially because last year I was locked away in quarantine, didn't really get to see anyone. So that's a slight improvement. But yeah, definitely more subdued than it has been in the past, I think. Okay, so now it's time to get out there and make some money after you graduate. So now you've got a money question for us. So lay it on me. Yeah, absolutely. So I basically just wanted to ask a question about inflation, which I've been reading a lot about recently, but of which I don't really have much real world experience because I was born in 1999. And since then, I think the inflation rate has hardly exceeded 3%. So I know that the government usually fights inflation with contractionary policy, like raising rates. But what would a market environment like that actually look like for

investors? What new areas would they have to look to for like appreciation, yield, or safety in their investments? This is like the question on everyone's mind right now. It's the most timely question out there. So congratulations on a great question. I mean, the first thing to know about inflation, it is very low still. It's up since summer. So you've asked how would stocks perform in that kind of scenario if interest rates rose. I'm going to read you a passage here. And this is from David Lefkowitz. He's over at UBS. And David is the head of Equities Americas over there. While very large and rapid moves in rates can create some short-term equity market volatility, we would expect this to be very transient. He writes, the last two times rates rose more than one percentage point within a three-month period were in late 2016 after the presidential election and in mid-2013 when the Fed indicated that it would start scaling back post-financial crisis

support. So these are two kind of case you know, case studies, right? He writes in 2016, stocks never experienced a setback of more than 2%. And the peak to trough decline in 2013 was only 5.6%. The S&P went on to gain 33% for the full year 2013. In other words, he's saying we saw a couple of test cases for this, and it wasn't that bad for stocks. So that would suggest that you have a little leeway for yields to climb without the stock market falling apart. But let me put a caveat there and just say, it's not really a long track record. We don't have a lot of instances of something like this happening. So we don't quite know. Okay. So I'm just going

to tell you one last thing, which is what you want to buy and what you want to avoid. I don't mean stock picks. I'm not going to rattle off a list of hot tips here for you or the next, you know, cryptocurrency or something like that. I'll just say that in rising rate environments, there are two kinds of stocks that tend to do poorly. One is the one that everyone knows, stocks with high dividend yields, because they act like bonds, right? So if you have interest rates rise, yields rise, then bonds can take a hit. Well, stocks that have big dependable dividend yields, people buy them largely for the income. Those can take a hit, too. So we're talking about utilities and reits and consumer staples sometimes it all depends on how quickly rates rise because

keep in mind rates are rising it probably means the economy is doing better too and if the economy is doing better well utilities probably don't care but reits might right reits might like the fact that the economy is getting better the second group is I think, surprising to a lot of people, and that is just the opposite kind of stock. These kind of glamorous go-go growth stocks where they don't have a lot of earnings today, but they're expected to have a lot of earnings five years down the road or 10 years down the road because they're changing the world. They're transformative companies. They're story stocks, right? And we know the story stocks have sky-high valuations. They're story stocks, right?

And we know the story stocks have sky-high valuations. Why would those react when interest rates rise? There's actually a pretty good fundamental basis for it. It's because when people try to come up with a price to pay for those companies, they do something called discounted cash flow analysis. And they're basically looking at what the cash flow is going to be like in the future. And what am I willing to pay for those cash flows today if we add all of them up? And the answer you get on that is highly dependent on what else you can do with your money. Can you park your money safely somewhere where you get a rate of return? The answer to that now

is no. Deposit accounts stink. Bonds stink. Everything is low yielding. But if we enter a world where there's a little more yield out there, it means you're less willing to pay those higher prices for story stocks today. So in a rising rate environment, I means you're less willing to pay those higher prices for story stocks today. So in a rising rate environment, I would expect high yield stocks to get hurt relative to others. I would expect story stocks to get hurt. What would I want to own? I'd want to own the kinds of companies that have cyclical exposure, meaning they make more money as the economy does better. And companies, dividend yields are okay, but I would rather see a company with a modest yield, with a lot of potential for raising those dividend payments

going forward than a company with a high yield today that's not going to raise its payments very much, maybe won't keep up with inflation. So those are kinds of businesses that I would try to be looking for. If I thought that inflation was going to rage, if I thought rates were going to rise, there are very mixed opinions on that out there. All I can tell you is, like you said, you said you haven't seen a lot of inflation in your life. Well, it has been a long time. So maybe it's coming now, maybe it's not. But I don't think you have to panic about the stock market. And those are the types of, if you wanted to reposition something for that world, that's kind of what I would be thinking of. You asked a 15 second question. I give you a 15 minute answer. I might have to check you for a pulse. Are you still there?

Absolutely. And I really appreciate the answer. I'm glad. I was concerned that I'd totally have to reposition to just real assets in the face of inflation. So this is kind of a relief for me. Thank you, Michelle, Michal, and Jack for your questions. And everyone, please keep the questions coming. Just tape on your phone. Use the voice memo app. Send it to jack.how, that's H-O-U-G-H, at barons.com. And thank you for listening.

Meta Lutsoft is our producer. Subscribe to the podcast on Apple podcasts, Spotify, or wherever you listen to podcasts. If you want to find out about new stories and new podcast episodes, you can follow me on Twitter. That's at Jack how H O U G H. See you next week.