The Dividend Cafe - Thursday - March 20, 2025

Episode Date: March 20, 2025

Navigating Economic Indicators and Tax Efficient Investing In this episode of Dividend Cafe, dated March 20th, Brian Szytel provides an overview of the day's market activity, noting minor declines across the Dow, S&P, and NASDAQ following a positive morning. He discusses several key economic indicators, including the Philly Fed manufacturing survey, jobless claims, existing home sales, and leading economic indicators, highlighting overall economic resilience. Szytell emphasizes the importance of staying invested during volatile times and avoiding market timing strategies. He concludes by answering a client question about the tax implications of withdrawing funds from a $10 million portfolio, offering insights into investment income and tax efficiency for different account types and allocation strategies. Szytel also wishes listeners good luck with their March Madness brackets, cheekily supporting Duke. 00:00 Introduction and Market Overview 00:31 Economic Indicators and Their Impact 02:12 Volatility and Market Timing 03:11 Investment Strategies for Volatile Markets 04:17 Tax Efficiency in Investment Portfolios 07:14 Conclusion and Final Thoughts Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Welcome to Dividend Cafe. This is Thursday, March the 20th. Brian Sightel with you here on what ended up being a positive day all morning and ended up giving way to loss of momentum here into the afternoon and a choppy afternoon, but not all that bad. We were down 11 points on the Dow S and P was down 0.2%. NASDAQ was down 0.33%.

So modestly lower day after a nice update yesterday, following the federal reserve meeting, but all in the economic calendar today had a few different things going on. We had a Philly Fed manufacturing survey that was slightly better than expected for March and was also very strong in February. So you've got a couple of months followed through in that region in manufacturing. That's a good thing, obviously. There was initial jobless claims that were more or less in line at 223,000, but it just shows continued solid footing in that labor market with employment.

And so those things are positive in the economy. And then you also had existing home sales today that were much better than expected. A lot of it was attributed to more inventory coming on. And so you have the ability to have existing home sales go up since there's more inventory. And so you have the ability to have existing home sales go up since there's more inventory and then you have pent up demand. People have been waiting long enough here to move if they need to. And then the last piece was a leading economic indicator that was down a little bit more than expected largely around growth concerns.

So that can be a little bit more real time. Then some of the other data that we've gotten, but all in all, still positive on the economic side. And that's what I wrote fundamentals in the economy are still there. We're doing just fine on growth, on employment, inflation has come down. Granted, it's a little above the 2% target, but still in the mid to high two is not that far off. And when you look at the employment picture, there is a much more balanced

picture. You've got about 7.74 people that are unemployed compared to about 7 million people that have job openings. And so those things are pretty darn close to one another in a very balanced labor market. I wrote today about volatility and the VIX is now right at 20. So elevated, but really not all that high. Historically, maybe it sits around 16. Okay.

So it's a little bit more than usual. Yes, there's more uncertainty and that's what markets don't like. And that's what we're dealing with around tariffs or on trade or on geopolitical things, all these things, but just keep in mind the average drawdown every single year is averaged about 13.3%. So we're not even at 10 here. So this is par for the course. That doesn't mean it should be dismissed or that it isn't important or that the topics of the day aren't different and

new and concerning. They all are and they should be taken into account. But the proper way to look at this is not timing the market. Should we keep cash on the sidelines and wait for some magic moment before we can put it in? Definitely not. And it's not pulling money in and out of the market. Those things are just wrought with error and just historically and statistically a terrible way to try to make consistent returns.

It's about time in the market. You really don't have the opportunity or the bandwidth to miss the five or 10 or 20 best trading days. If you try to sit on the sideline. And so the better way to approach it is to take advantage of volatility. Put cash to work from the sidelines. Work with your advisor. Make sure your allocation is appropriate. Make sure particularly in this 2025 market, you're focused a little bit more on income, a little bit more on asset allocation, including alternatives.

All of these things are going to help you navigate what is an expensive overall equity market and what is proven to be higher volatility here recently. And if we stick to those fundamentals, it'll work out just fine. And that's not predicting anything short term. I really don't care about that. I'm talking about anything realistic for any normal investor, mid and long term. That's the way to approach these things. So I know it doesn't sound like rocket science, but since the questions come up so much, I thought it was worth reiterating because almost daily there's different

folks attempting to walk down that slippery slope of not following those fundamentals. And so I want to make sure they ring home. Okay. Moving on to the question for the day. This came in from a client asking about just a hypothetical, if you had a $10 million portfolio and you were taken 5% out of it to live on, would that be taxed at capital gain rates? So I guess I could answer in a short way and say, sure, it would be more capital

gain than ordinary if you're withdrawing like that, but I believe what the client was really after was talking more about the taxation and how income is generated in the account. So I'll simplify the hypothetical to say that if we look at this account as just a non-qualified account. So think about a single account or a joint account or a trust account. And you thought about a balanced approach, meaning it had 50, 60% in stocks, something like 25% in fixed income, and maybe

something around 15 or 20% or so in alternative investments. Then you're going to have a combination of different types of investment income, and there's different tax rates to all of it. And you have to average out, which you'll ultimately pay, given these different sources that are going to reflect in your 1099 statement. But assuming you're in a higher tax bracket, a portion of the income that you'd have would be exempt completely because it would be from tax-free municipal bonds.

So let's say a quarter of the income is exempt completely from tax in that asset class. You'd have perhaps about 20% of the income generated from private credit and other alternative investment funds. Most of that will come out as ordinary income, some capital gain. Then you'll have a good amount in dividend income. Of course, if we're managing the assets, that equity portfolio will produce, maybe

half of the income produced overall in the portfolio would be in that dividend equity portfolio. And so you'd have about 50-50 between qualified dividends at capital gain rates and the other 50 at ordinary dividends at ordinary rates. And then you will have some interest income taxed at ordinary income, because we're going to have some things in there like cash. You may have individual bonds that pay interest income, so on and so forth. When you boil that all down,

you get something that is more efficient than ordinary, but probably something a little higher than capital gain tax rates. It just depends on where assets are located. If they're in retirement accounts or outside of retirement accounts, efficient than ordinary, but probably something a little higher than capital gain tax rates. It just depends on where assets are located. If they're in retirement accounts or outside of retirement accounts, if the allocation is more balanced, if it is more focused on tax-free municipals, if it's more focused on alternatives, all of those things are going to make a big difference on the tax situation. But the purpose of including this in here, which was a live question that I got about a week ago, that people are interested in how to maximize and optimize their income and in a tax efficient manner.

And that's what we do for each individual client. It always is customized. Now you have people in different states. You have people in some states with higher amount of municipal inventory, some States with zero in municipal inventory. We even have some clients that are not located in the United States that have different tax jurisdictions to pay attention to. So all those things matter. We spend a lot of time getting it right. And that's a little bit about it in dividend cafe for you today. So with that, I'm going to let you get back to looking at your March madness basketball brackets.

I wish you the best of luck with them. Um, I have never won my bracket in my life, but we will see how this year goes. So go Duke. Aside from that, I wish you a wonderful weekend. Reach out with your questions. Thank you very much. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC member FINRA and SIPC with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities. No investment

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