The Dividend Cafe - Tuesday - June 10, 2025

Episode Date: June 10, 2025

Market Updates and Strategic Investment Insights - June 10th In this episode of Dividend Cafe, Brian Szytel provides a market update for Tuesday, June 10th. Key highlights include modest gains in the Dow, S&P, and Nasdaq, and discussions on U.S.-China trade talks, particularly regarding export controls and natural resources. Brian analyzes market valuations, noting they are on the expensive side, and recommends a focus on selective investment in dividend growth stocks. He also discusses the attractiveness of sectors like Staples, Financials, and Energy. Additionally, Brian touches on the tax implications of different dividend income sources and reiterates a focus on fundamental analysis over market sentiment. He encourages listener questions and outlines plans for future episodes. 00:00 Introduction and Market Overview 00:26 US-China Trade Talks 01:03 Inflation and Market Sentiment 01:54 Valuation Concerns 03:35 Investment Strategies and Sectors 05:55 Qualified Dividend Income 07:03 Conclusion and Upcoming Updates 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 Tuesday, June the 10th. Brian Sightel is with you here on a modest overall positive day in markets. The Dow was up 105 points, the S&P closed up about a half of a percentage point, NASDAQ was up about two thirds of a percentage point.

Ten year yields were about flat, down about one basis point, we closed right at 447 on tens. And the big news really for today is the ongoing talks between the US and China and London on trade and the different give and take that they'll come away with. What is being talked about is essentially an easing of export controls on things like

technology and jet plane engines, things like that to China from the US and then in return, China easing natural resources like rare earth minerals back to the US. Lutnick had comments out today that the talks went really well, quote unquote, but there isn't anything final, at least as of market close here on Tuesday the 10th. We also have CPI out tomorrow. So we've got a fresh read on inflation. We're looking at about a 10th of a percent for the month, which will be about 2.9% on core year over year. So a slight tick higher, but again pretty

modest for the month. But we're basically now only down about 1.7% believe it or not from the all-time highs in February on the S&P 500. So that's quite a round trip. If you remember how people were feeling and what was going on after Liberation Day, call it April 8th, April 9th, April 10th, markets were going down 5, 6, 7, 8, 9% in a day. That's simply just unraveling investor sentiment at that particular time. So it was a big washout period and you've come full circle or I should say full of V, which is right back to where we were at least, about 1.7% from the high.

But that puts us right back to 22 times earnings, and that's after a very robust earnings season. We actually got 14% earnings growth, which was better than expected, and we're still back to 22 times earnings. So I don't really care what metric we put on this thing. The broad indices are not cheap. They're in fact the opposite. They're expensive and they're especially expensive when you consider where interest rates are. It's one thing in 2021 or 22 when you have rates basically at zero. We'll call that more 21. And so the risk-free rate being so low you can warrant a higher multiple on markets. That's not where we are today. We're at four and a quarter to four and a half on Fed funds.

What is priced in is about two thirds or say 60% chance for two rate cuts in the year of 2025 before the end of the year. But that just puts us back to about 375 to 4% on a risk-free rate. That's overnight rates, but the 10-year will trade somewhere similar to that too. So all that to say markets are not cheap.

And if you actually look at equity risk premium, which is essentially the earnings yield on the S&P 500 compared to the tips yield, the inflation protected treasury yield, you're at about half of historical averages. So again, another one of those metrics, but it doesn't matter if you look at price to book, price to earnings, price to free cash flow,

they're all at the higher end of percentile ranges here on markets. And my comments are not to say throw equities out the window. There are more to the naysayers and the doomsayers, which is I get all those things, but that doesn't mean markets won't go higher. And I wouldn't worry too much about it

because we're active investors to begin with and I wouldn't own the broad indices at these levels. They're highly concentrated in a few sectors and a few companies. And I would be much more selective here. And that's where we really come back to hitting home with dividend growth in a higher percentage of total return going forward coming from the return of profits in the form of rising dividend streams. And sure, that's me talking my own book to a certain degree.

But if you just think about what I just said on valuations and where things are, then I think it makes even more sense today than it has in many other periods of time. That said, I'll be on a media hit later today. And so some of these broad topics I'll be talking about, but from a sector perspective, you could look at staples, which of course we always have some exposure to and look at the pricing power of some of these companies, look at the fact that inflation has come down

and the prices that were increased have not come down in the same tune. So there's pricing power and stickiness there. You could even go so far as to say, potentially tariffs can do the same thing, where you get an increase in prices based on higher consumption taxes that ultimately never materialize, and then you get a broader margin. But staples are attractive to us, financials.

If you think of M&A activity, we've actually done about $450 billion in M&A activity just in Q1. And while I don't subscribe or will own ever companies like this based on just valuation and the lack of earnings completely, if you look at the two very large IPOs in the technology sector here the last month, they've done really well. And so there's just some animal spirits stirring again in activity. That'll bode well for financials and you can buy selectively at least financials that have high dividend yields that grow those dividends both in the asset management space and also in some of those activity spaces, call it M&A and IPO.

And then the last thing would be the energy space. And we've talked about this a lot, but that midstream energy space still has really clean balance sheets compared to where they were say 10 years ago. And you just have a bigger demand for exporting LNG across the world. We have a whole lot of it. And I think there's a very high convicted investment thesis in that segment as well, all of which are big dividend growers. That's what I have for you today as far as where markets are, valuations, where there's

opportunities and why I wouldn't read in too much of the, aka, perma bearers that will basically be right at some point. Maybe they were right in the month of April and now they're wrong here in the month of June, but who cares, right? So we look at fundamentals, there's still positive diamonds in the rough. That's where we tend to invest. There was a question on qualified dividend income from companies that we own. And my comments are that we don't put the tax car before the investment horse.

So there's that part. Yeah. Dividend stocks tend to be taxed advantaged because the dividends the dividends if they're qualified or taxed at capital gain tax rates super Big plus there of course there are certain sectors REITs are one of them in the real estate space where the dividends are ordinary and MLPs while the dividends are actually return of capital and lower cost basis There is an ordinary income recapture when you were to sell the MLP and ultimately get a final K-1 statement from it. So those two things are different and we have exposure to those two. But for the most part, if you're owning dividend names in our portfolio and elsewhere that

produce qualified dividends, you own them for more than 60 days and a quarter and 60 days prior to the X-State of when the dividend is declared, then they are treated as qualified and that's an attractive tax paradigm. The question was more related to do we screen out companies that only pay ordinary dividend income and we don't since we own MLPs and in REITs but nonetheless it's important and it was a great question from a great reader. But with that I'm gonna let you go for this evening. I'll be back with you more on Dividend Cafe certainly next week, Monday, Tuesday, Wednesday and potentially the remainder this week as well.

But we'll see where markets trade. And with that, I'll look for your questions. Have a lovely evening. Thank you. 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.

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