#83 – Tracking Tariffs, Rising Costs, and Income Strategies for Investors

Connor Miller [00:00:57]:
Football.

Wes Moss [00:00:58]:
School. We’re knee deep in school. High school football started this past Friday. That’s fully under swing. College football starts this week. Well, I guess it’s technically next Saturday, so we’re in week zero. But before we talk about that or go further than that. Did you just had a, A, didn’t you just start one of your girls Kindergarten?

Connor Miller [00:01:19]:
Kindergarten. My oldest started kindergarten last week or the week before. It’s.

Wes Moss [00:01:24]:
How’s she doing? How was it?

Connor Miller [00:01:25]:
She loves it. It’s been fantastic. It’s a big deal when your first kid starts kindergarten. I’m sure.

Wes Moss [00:01:33]:
As you know, I remember it’s been.

Connor Miller [00:01:34]:
A while, but it’s a lot of emotions come up. But the first couple weeks have been great. She actually got from her teacher, she got like the kindness award in class and she was so excited.

Wes Moss [00:01:45]:
Oh, come on. To tell us if your girls could be any cuter. And they’re like little angels running.

Connor Miller [00:01:51]:
My wife must be doing something right and raising them.

Wes Moss [00:01:54]:
She is an angel. She’s an angel.

Connor Miller [00:01:56]:
But yeah, it’s. No, it’s, it’s, it’s been awesome. And I, I was asking her, I was like, well, how’d you get the kindness award? And she’s like, well, one of the other kids in the class was missing his mom and I went up and gave him a hug. I’m like, you got to be kidding. Proud parent moment right there.

Wes Moss [00:02:09]:
How’d you get the kindness award? This kid was about to sit down and I yanked his chair out before he sat down so he fell.

Connor Miller [00:02:17]:
And then I gave him a hug.

Wes Moss [00:02:18]:
And I gave him a. The Federal Reserve Connor Miller, completely going from the cutest topic on the planet to the topic that the world is obsessed with in so many different ways. Federal Reserve set to meet next month. Remember, the Fed is the, is really the governor, as in the engine of the economy, meaning that they control the fuel line, they want to stimulate the economy, they open up the fuel line. That’s the equivalent of lowering rates, making everything cheaper, little easier to do business. They want to slow things down, slow inflation down. They raise rates, they tighten rates and they tighten that fuel line. Less gas going to the engine.

Wes Moss [00:02:56]:
So that’s their control over at least a large part about the economy. Look no further than housing as an example. Low interest rates, housing booms, high interest rates where we are today. Housing is, has pretty much been on ice ever since mortgage rates got into the 7% range. Now 6, call it high sixes, low sevens, where we’ve been for a long period of time. They are set to meet next month and the markets are looking now and saying, well wait a minute, what is, what is the next phase of what the Fed might do? And there is a greater and greater propensity over the last call it week ever since we got the latest inflation numbers that we’re going to talk about today. Today we’re talking cpi, PPI and vix. The vix ever since we got the last jobs report which was weaker than expected and the last CPI report on inflation which was calmer, cooler than expected.

Wes Moss [00:03:55]:
Now the expectations for this upcoming meeting in a couple weeks the Fed, they should start cutting. At least that’s what the market is expecting.

Connor Miller [00:04:03]:
And this is really the first live meeting that we’ve seen in several months now remember the Fed had cut a couple of times last year. About a year ago.

Wes Moss [00:04:13]:
When you say live meaning, meaning that this is the first one is in play where the.

Connor Miller [00:04:17]:
Yeah, the market is expecting them or there’s a high probability of the Fed actually resuming their interest rate cuts because earlier in this year they really wanted to wait and see how tariffs would impact inflation. And they’d been saying for a couple of months now, well, it hasn’t been showing up in the data yet. We want to give it a little bit more time. The labor market still looks good. Now we’ve gotten more data points that we’re going to talk about today that really make this meeting, you know, as live as ever.

Wes Moss [00:04:45]:
It’s a hot meeting. For a second there I was thinking it was, you knew something I didn’t. As in though they’re just going to broadcast it live from. Is it D.C. where do they meet?

Connor Miller [00:04:56]:
I don’t know. We’ll have to, we have to figure.

Wes Moss [00:04:57]:
That out live from the Fed table. Every single, we’re going to hang on every single word but. Right. Interest rate changes are really in play here making It a very much a live meeting today. Cpi, PPI and VIX are as in the vix. And then later in the show we’re going to talk about the five pillars of income investing which you talked a bunch about this week. I said wait, this would be great for Sunday morning. So we’re going to get to that.

Wes Moss [00:05:25]:
But CPI which is the Consumer Price index, obviously the total CPI which ironically includes food and energy. That’ll make sense in a second. Prices only up 2.7% year over year. Core inflation, which you would think the core of what we have prices would, you would think it would include food and energy and it actually excludes food and energy. So that’s why it’s, it’s a confusing name I think for it it should be something that signals that we’re reducing the list of things we’re measuring. Instead it’s. It says core as in everything. But anyway, so core, you get rid of food and energy.

Wes Moss [00:06:08]:
That was up 3.1% annually. So the market to some extent like really liked the 2.7 number mostly because the expectation was 2.8 and it came in a little bit lower then the next set of numbers was the ppi. We got that after the CPI number and that was actually hotter than expected. And that’s the Producer Price Index a.

Connor Miller [00:06:30]:
Lot hotter than expected because it.

Wes Moss [00:06:33]:
And it was up Almost a full percent month over month and it was what? Up 0.9 for just a month. But it’s really as far it was producing prices jumped 0.9% from June. Imagine if you had prices going up 1% a month. You’d be up 12 in a whole year. So that’s a really big number. But total year over year basis PPI up 3.3% which is very different from where we were last only a month or so ago, up 2.3%. So and again, what is the Producer Price Index? Think of that as the input costs and wholesale prices for what companies or producers are paying. So it’s, it’s meant to be more of a leading indicator that filters through to the cost of a good.

Wes Moss [00:07:16]:
Then we buy it as a consumer. That’s the consumer price. But it would make sense of course that it the producers cost starts to flow through.

Connor Miller [00:07:25]:
Yeah. So think about it this way. You go to the grocery store and you go to the produce section and you’re going to buy some vegetables. What the grocery store pays for those vegetables, the price that they pay would show up in the Producer Price index because it’s the wholesale cost. And what we Pay at the grocery store is the consumer Price index because it’s what consumers are paying for those goods.

Wes Moss [00:07:45]:
So ppi, I’ve always thought of it as we’ve dove into PPI this week, just revisiting it. I don’t think I hadn’t thought of it as much as wholesale prices, but that is a big part of it. The other huge part that makes just intuitively more sense is that anything that a company needs to buy to put together into a machine manufacturing, you’re buying a thousand components, that’s obviously the input. So all of those prices that go into a final product, of course that’s part of ppi. So that’s where we stand that, that’s a little counter to the story that oh, inflation’s fine, everything’s when it’s low, it’s in the twos. However, it has not seemed to dissuade the market from thinking, oh, we’re getting a Fed cut.

Connor Miller [00:08:32]:
And what we had seen was with the jobs data a couple weeks ago with the CPI coming out, both of those data points increase the odds of the Fed cutting rates in September almost to the point where it’s basically 100% chance at least is what the market was pricing in about 100% chance that the Fed was going to cut by a quarter point in September. Then you get the PPI print. It moved it a little bit, but it’s still an overwhelming probability that we’ll probably see a Fed cut in September.

Wes Moss [00:09:05]:
What about just the pressure on Jerome Powell to cut rates? Do you think that is filtering through it all? Or is this two out of three economic numbers that say it’s okay to lower rates good enough for him to say, gosh, I’m just going to start lowering rates. Or do you think he doesn’t care about the political pressure?

Connor Miller [00:09:23]:
It really doesn’t seem like he cares. It almost seems like he knows he’s going to be in the seat until next May and, and he’s not that long from now. Yeah, I think the pressure that he saw a couple months ago maybe contributed to it but he, he held steady so.

Wes Moss [00:09:36]:
Well, that’s where we stand economically. We’ve got a, a unemployment rate that’s still very low, only at 4.2% CPI 2.7. The question is, is this PPI number now that the impact of inflation because of the tariffs now again, if you, if you talk to an economist about the way that should impact inflation, it should be more of a one time price raise and inflation is very much about the, at the Annual rate of change. If we are now, if companies importing are paying this tariff and they’re passing it through the consumer, theoretically it should only last one time or for a couple of months.

Connor Miller [00:10:20]:
Right.

Wes Moss [00:10:20]:
But it’s not a one month thing. It’s probably a multi month thing as, as the higher cost because of that tariff filters through. But then once everything continues to be tariff, it doesn’t mean that prices will keep going up. So it’s more of a one time event.

Connor Miller [00:10:33]:
Yeah, I mean I look at it this way. Inflation to me is more of a symptom of a mentality that a good or a service is going to be more expensive a year from now. And so you’re either anticipating a purchase of goods or you’re going to employer and you’re asking for a raise to keep up with inflation. So tariffs could contribute to that, but just taken at face value, they really are more of a price level increase, not an actual inflationary increase.

Wes Moss [00:11:02]:
Which again that’s the whole reason the Fed likes inflation is that it puts this mild pressure on all of us to transact today. If you had prices going down, people would just wait and it would stop commerce. Everything would buy, I’ll wait till tomorrow because it’ll be cheaper.

Connor Miller [00:11:19]:
Exactly.

Wes Moss [00:11:20]:
We know that the way that our economy works is that prices slowly go up over time. Time and, and it’s a little bit of a tailwind and a nudge to say you, you, you’re probably better off today purchasing the assets just because of that constant of, of inflation. The other three letter symbol that I wanted to mention today because it’s in an interesting place is the VIX or the vix the CBOE volatility index that we watch every day. I, I heard it this week referred to as the chill ometer and it’s the gauge. If it’s low that means that everyone is calm. If it’s high, it means that market participants are nervous and very jittery, if you will. So the VIX measures expected volatility in the market or the stock market over the next 30 days. It’s based on options prices for the S&P 500.

Wes Moss [00:12:14]:
So if we have a low Vix, then people are relaxed, investors are feeling confident, they’re calm, they’re not expecting big swings. If the VIX is high, it means the markets are very jittery and that could be an economic uncertainty, election war, inflation, you name it. And something in the 30 range means there’s high anxiety. So kind of those ranges we’re now we just got into the relaxed mode if you will. Anything that’s between 10 and 15 and now we’re right around 15. Low fear, stable environment, 15 to 25 where we’ve been for a long time. Watchful caution, 25 to 35. Nervous, big swings expected.

Wes Moss [00:12:52]:
And then the 35 plus like we saw during the, the tariff temper tantrum if you will. VIX was at something like 50, wasn’t it?

Connor Miller [00:13:00]:
Yeah, I mean went up 45 I think intraday, maybe even got to 60. It was about as high as it.

Wes Moss [00:13:06]:
Gets now the market is relaxed at least for now. At least for now. Connor Miller let’s talk inflation. The CPI report, relatively calm, relatively benign. That’s why the marketplace in general is looking for a rate cut at the September 17th meeting. So we got a couple weeks before that happens but it’s the usual suspects that continue to be a year from a year over year perspective still really high. We’ve got eggs, roasted coffee, beef, steaks, ground beef, all in the up 11 to up 16% range. Candy and chewing gum.

Wes Moss [00:13:42]:
I don’t know, I don’t know why there’s a spike there. Juices, drinks, etc. But a lot of the usual suspects still on the high inflation list. This one’s a little threw me for a little bit of loop college textbooks in is is one of the biggest gainers year over year up almost 13%. I didn’t think college kids even use textbooks anymore. Isn’t everything online?

Connor Miller [00:14:05]:
I would think so. I mean especially with, with the use of AI Chad GPT now you would think prices would actually be going down.

Wes Moss [00:14:12]:
That doesn’t make sense. I could see furniture as one because a lot of that gets imported. I could see tariffs maybe giving that a bump at least just recently. Then you’ve got delivery services. Delivery services excluding postage up 7.6%. That could be doordash demand. I suspect that’s probably in the delivery category.

Connor Miller [00:14:36]:
Yeah, I would think so.

Wes Moss [00:14:37]:
Utilities, if we look at energy, utility or piped gas up about 1314. Electricity up 5. So put it all together and you have a CPI that now those are the big outliers. On the upside there’s plenty of things that were flat to slightly down. That’s why we ended up with a 2.7% CPI. So it is interesting though to see the input costs, the producer price index have such a big surge and that’s something that the Fed’s obviously got to watch really, really close.

Connor Miller [00:15:07]:
And we will get one more CPI and PPI released as well as another jobs report before the Fed meeting. So that’ll be interesting to see how that data comes in if it sways.

Wes Moss [00:15:19]:
And as you said, it’s a live Fed meeting. So we’re just going to get to watch every, every move live as in an interest rate cut may be coming. We’ll see. Hard to predict. What we’re going to get into after the next break is really the pillars of income investing. We mentioned one of these the last couple of weeks, multi asset class income investing. But Connor, you talked a lot about this this week with our team to really reinforce and reiterate the pillars, five of them. When it comes to this whole moniker of income investing, it’s really about multi asset class income investing, high diversification with different income sources.

Wes Moss [00:15:57]:
But it also includes some other components that are around financial planning, not necessarily just investing. And that would be withdrawal rates and the 4% rule of thumb or 4% plus rule of thumb. I noticed you didn’t have plus there. You just kept it at 4%. I like to say 4% plus but that’s okay. Dividend growth, not just dividends, but growing dividends. The principle around dry powder or safety assets. And then number five pillar tax efficiency.

Wes Moss [00:16:28]:
And there’s a lot of different ways to look at tax efficiency when it comes to owning individual stocks. Not to mention dividend rates typically are more favorable for investors. But we’re going to circle all of that. Cover the five pillars of the moniker here, the overarching income investing, more money matters straight ahead. Our research shows the number one fear for retirees, uncontrollable economic and market swings. And after the last five years that’s totally understandable. But here’s the good news. Happy retirees are twice as likely versus unhappy to have a financial plan.

Wes Moss [00:17:06]:
A plan can calm those worries. My team at Capital Investment Advisors would love to help your family build a plan you can feel confident about. Just pick a time that works for you@your wealth.com that’s y o u r wealth.com Connor before the break we had preview that we’re going to talk about the five pillars of the overarching theme which is income investing and that’s the 5 or multi asset class income investing. The 4% rule of thumb, dividend growth dry powder principle and then tax efficiency is the fifth pillar. I think I wanted to start I really like the way you laid out the we’re all after the same thing and I’ve spoken about this before. Total return we all want it equals growth plus income. But then there’s a little bit more to that, so dig into that. And this multi asset class income investing.

Connor Miller [00:17:59]:
Well, yeah, I mean as multi asset class income investors, we are at our core we are total return investors. And so what we mean by that total return consists of two things, growth and income. And when you think about what growth means, that’s if you’re invested in a stock, it’s the price change that you see. And then the income piece of that, whether it’s a stock or a bond, would be the dividends or interest that you receive on those. And I think the important piece here to talk about is, is from a growth standpoint, we have no idea what the market or a stock is going to do in the short term. Whether it’s a month or a year. Even the smartest people in the industry have no idea what the market’s going to do. And so by income investors in the short, short run, in the short, short run, by being income investors, you’re able to solve at least for some predictability in the portfolio.

Connor Miller [00:18:56]:
And that really comes in the form of income. And we receive income through dividends on stocks, through interest on bonds, through distributions on things like energy, infrastructure investments, real estate investment trusts, preferred stocks, closed end funds, things like that. And based on historical data, we can say with a high level of confidence, we can’t guarantee anything, but with a high level of confidence that the income you receive in a portfolio is going to be relatively stable over time. And so it’s solving for one of the variables in that equation that really helps you participate in growth over time.

Wes Moss [00:19:34]:
Allows you to be more patient for the growth. The other half of the equation, if you will. I guess think of it this way, and this is how you laid it out this week, which I like, which is growth in the short term, super unpredictable, longer term, historically relatively predictable. So it’s half of it’s somewhat predictable over time. Income though it’s short and long term, historically relatively predictable.

Connor Miller [00:19:58]:
That’s right. And I think by having the income piece you can then be focused on the long term aspect of growth, which we know over time by looking at historical data, you’re going to see positive returns in stocks over the long run, as an example.

Wes Moss [00:20:15]:
So the general market right now, which again is dominated the largest companies, Nvidia, the number one company on the planet at this point. Yeah, size wise, four plus trillion, the dividend. And Nvidia doesn’t pay a dividend.

Connor Miller [00:20:27]:
Very, very tiny.

Wes Moss [00:20:29]:
It’s like a 0.1%, it’s tiny. So some of the really big companies that dominate the market have very low dividends or no dividends. In the. Amazon’s an example, they don’t pay a dividend. Meta doesn’t pay a dividend, I don’t.

Connor Miller [00:20:41]:
Think does it just.

Wes Moss [00:20:42]:
I think it’s another tiny, minuscule dividend. Yeah, but the point here is that you have low or no dividends from some of the world’s biggest companies. Well, we know Berkshire Hathaway doesn’t pay dividends. They love dividends, but they don’t pay out dividends.

Connor Miller [00:20:56]:
Right.

Wes Moss [00:20:56]:
And they dominate the market. So it stands to reason that the overall yield right now, the income you’re getting from just The S&P 500 is really as low as it’s been in a really long time. 1.2.

Connor Miller [00:21:11]:
Yeah, one plus percent.

Wes Moss [00:21:13]:
So it’s a really low dividend yield. And how would you then look at some of those categories that you just mentioned, Dividend stocks and bonds and energy infrastructure, et cetera. What do those yields look like just in general relative to the. Just slightly over 1% for the S&P 500?

Connor Miller [00:21:32]:
Yeah. So if you look at dividend oriented stocks or dividend growth oriented stocks, you’re going to find yields much higher than the market. More in like the 2 to 3%.

Wes Moss [00:21:41]:
Range, which still doesn’t even sound that high. It’s just on a relative basis it’s so much higher than one.

Connor Miller [00:21:48]:
Yeah. I mean if it’s two and a half, it’s basically double what you find in the S&P 500. Fixed income obviously comes in all different shapes and sizes. From Treasuries at call it 4%, you know, all the way up to two high yield bonds which can be, you know, 7, 8% energy infrastructure investments. I would throw utilities in there. I would throw oil and natural gas pipelines. Those could yield really anywhere from 4 to 8%. Call it REITs.

Connor Miller [00:22:15]:
3 to 5%.

Wes Moss [00:22:17]:
3 to 5.

Connor Miller [00:22:17]:
Yeah. And then preferred stocks again I’d throw that. That’s kind of in like a fixed income plus type yield range, probably around the 4 to 6% range depending on the quality of the investment.

Wes Moss [00:22:29]:
The next pillar of this. Why do you put the 4% rule of thumb? We also call the 4% plus rule of thumb just to remind folks that it is not necessarily an exact number. It’s a, it’s a target range. Starting to sound like the Fed here. The range it target number, the 4% rule of thumb. Why is that a pillar of income investing?

Connor Miller [00:22:51]:
Well, that’s really the foundation that you start at. If you are in the range of either Being in a period of life where you’re withdrawing from the portfolio or approaching a period of life where you’re going to be within the withdrawal phase. And when we’re looking at your portfolio and your overall financial picture, we want to determine, we want to maximize how much money you’re able to withdraw from the portfolio each year, but still maintain the sustainability of that to ensure that you don’t run out of money. Given whatever your time horizon is, max.

Wes Moss [00:23:23]:
It out without running out.

Connor Miller [00:23:24]:
Right.

Wes Moss [00:23:25]:
And that gives us. And where do we land? I know we’ve, we’ve done a ton of metrics around this, you and your team.

Connor Miller [00:23:31]:
Well, and like you said, it’s not a hard and fast rule. We’ve landed at kind of the 4% range because given a balanced portfolio of anywhere from 50 to 70% in stocks, you know, 50 to 30% in fixed income, you have an extremely high probability of, of taking your 4% and then each year after that adjusting higher for whatever the level of inflation is. You can say with an extremely high success rate historically that that money is going to last you around 30 years, which in many cases is the duration of, of a retirement.

Wes Moss [00:24:09]:
I’ve seen a lot of these charts. I don’t know if I remember. I always think of it as 99%. When you’re looking at the 4% withdrawal rate or 98% of cases, money hasn’t run out and you’ve been able to take your 4% from year one and then adjust that higher every year for inflation. That nominal number here, this initial withdrawal rate, there’s a 100% category in there. Yeah.

Connor Miller [00:24:33]:
And let’s, let’s stick with 99% just to, just to make sure. We don’t want to guarantee anything.

Wes Moss [00:24:40]:
Past performance is not indicative of future results.

Connor Miller [00:24:44]:
Exactly. But, but given a 6040 allocation, again, this is just using traditional stocks and bonds. It’s not including the other assets that we like to invest in as well to get both growth and income in the portfolio. You know, I’d say nearly 100% chance based on historical data of you being able to follow the 4% rule. Take 4% each year adjusted higher for inflation after that and not running out of money over.

Wes Moss [00:25:08]:
What about dividend growth? We think about dividend sustainability, but what about growing the dividend as. And you have this as a pillar.

Connor Miller [00:25:18]:
This is a pillar. I mean, this is the kind of the core stock equity philosophy that we look at. Because dividend growth really captures multiple areas of the market. I like it because it captures your high dividend payers. But then it also captures a company like Apple or Microsoft who may not pay a huge dividend, but we know those are quality companies and is growing, growing their earnings and are going to grow their dividend over time. So you get kind of a blend of the best of both worlds.

Wes Moss [00:25:46]:
Not a buy, hold or sell recommendation, by the way.

Connor Miller [00:25:48]:
That’s right. But looking over the last 10 years, looking at an index that consists of only dividend initiators and growers, we can see over the last 10 years there’s been about an 8% annualized growth rate and dividends over that time. And along the way We’ve had multiple 20% pullbacks, a 25% pullbacks in stocks. We had the COVID 19 induced sell off where stocks fell 35%. The one constant is seeing that dividend grow year in and year out. Now it’s not always going to be 8%. Some years it’s higher, some years it’s lower. But the one constant is seeing it grow year in and year out.

Connor Miller [00:26:25]:
That again, when you think about the long term, you’re able to experience the power of that dividend growth.

Wes Moss [00:26:30]:
The other metric we don’t think about a lot is called yield on your original cost. And just explain that. Or in the same exact, or in this same outline, 10 years ago, dividends for this particular index were 2.4%.

Connor Miller [00:26:48]:
Yeah. So if you invested a million dollars, you got $24,000 a year in dividends. Well, as those grew each year today that same investment would be paying you over $50,000. And so yield on cost is just.

Wes Moss [00:27:02]:
Looking at what you’re getting today relative to what you put in. So now that yield on cost would be over 5%.

Connor Miller [00:27:08]:
Over 5%. Yeah.

Wes Moss [00:27:09]:
So that’s the other way to turn into a 5% is time. It’s time. And it’s also the growth of the dividend as well. Then we move to the concept you call this just dry powder principle. We’ve talked about it on Money Matters for many years now. But why is that a pillar of income investing?

Connor Miller [00:27:30]:
What the dry powder principle does is really enable us to participate in the growth of the stock market over time. So as long as you have enough dry powder, what we mean by that is basically, basically solving for your income gap. So let’s say the portfolio income you’re generating from dividends and interest, any outside income you have, maybe it’s through Social Security and comparing that with your overall income needs, well, as long as you are able to satisfy that buffer each year through the Use of dry powder, whether it’s through Treasuries or high quality investment grade bonds, you never have to touch your stock exposure if you don’t want to. So we’ve, we’ve gone through periods in the past, you know, from 2000 to 2007, the market didn’t set a new all time high, seven years. And so as long as you have enough dry powder to last you through that, you never have to touch your equities and you don’t risk losing your original principal.

Wes Moss [00:28:27]:
You put it as outlasting market corrections so that you’re not having to tap the volatile part of the asset base or your portfolio. Maybe it’s down because we’re in a correction or a bear market. The dry powder is supposed to help you outlast and let and pull from that piece of the equation to allow for the market side to recover. But we say three years for a reason why we want three years worth of dry powder and why.

Connor Miller [00:28:53]:
Yeah, and I would say three to four years because the last four major corrections that we had, you know, 2000-2007-2020-2022, when you take the average there, it was about three and a half to four years. And so whether you want to use three years or four years before markets eventually recovered. Exactly.

Wes Moss [00:29:12]:
And now tax efficiency. I wanted you to talk through why income investing. You say it’s more tax efficient than other ways or just be. To be successful at it, you have to be mindful of it.

Connor Miller [00:29:26]:
To be. Yes, to be successful, you want to be mindful of either the opportunities or the penalties that could be associated with not taking advantage of opportunities. So we’ll start with asset location. And all we mean by that is making sure that you have the proper assets. You know, stocks are treated different from a tax perspective, from a tax standpoint, potentially different than the interest on bonds. And so you want to make sure they’re in the right location. So you know, we just separated this into three categories. You have your taxable accounts, which is like your brokerage accounts, tax deferred accounts, you know, traditional IRA or 401k, and then your tax free accounts, which would include Roth IRA or Roth 401K.

Connor Miller [00:30:11]:
And so what you want to be mindful of is in a taxable account, for example, you want to put your most tax efficient investments in there.

Wes Moss [00:30:19]:
So it would lean towards stocks that pay dividends, arguably for most people, at a lower rate than potentially bond interest would be. However, you could also use municipal bonds that have no tax because for the.

Connor Miller [00:30:33]:
Most part your Capital gains rate is going to be lower than your ordinary income rate. And so you have things like muni bonds, index funds and ETFs which are a little bit more tax efficient. Individual stocks with qualified dividends or investments that you plan on holding for more than one year. Want to put those in your tax efficient vehicles which is, which would fall in line with the taxable account. And on the inefficient side, you know, this would be traditional bonds. So investment grade bonds, high yield bonds, real estate investment trusts which are not, don’t really have qualified dividends.

Wes Moss [00:31:03]:
Right. They come at income you receive from REITs for the most part is tax at ordinary income rates.

Connor Miller [00:31:09]:
That’s right. Or you know, actively manage investments that you are plan on holding for less than a year because you would pay ordinary income tax rate on the gains there.

Wes Moss [00:31:18]:
And if you have high turnover potentially.

Connor Miller [00:31:21]:
Exactly. The other piece of this is really the tax loss harvesting potential of owning individual stocks which is the two sided.

Wes Moss [00:31:30]:
Coin of high turnover. High turnover could actually mean tax efficiency if you’re tax harvesting.

Connor Miller [00:31:36]:
Sure. But basically the rule allows for to offset your gains, your capital gains with capital losses in the portfolio. And what we wanted to illustrate to our team was really that there is a benefit to owning individual stocks over owning an index fund or an ETF. Whereas we know that historically the S&P 500 does 8, 9, 10% per year. But on average the number of members in that index that are down on a year over year basis is about 38%. And so by holding your money just in an ETF or in an index fund, you’re not able to take advantage of those losses that you could if you owned them individually.

Wes Moss [00:32:20]:
Particularly when you’re, when you have liquidity needs that come up over time, they may be somewhat erratic, it may be a little bit every month. But then all of a sudden I have a project. If you have individual companies, even if a portfolio has done well, there may be a few places to take from that are flat or lower that gives you your tax efficiency. It’s a version of tax loss harvesting. So those are the five pillars. Connor Miller of Income Investing and I thank you for going through that with our team this week. And then of course here on Money Matters, you could find Connor Miller and me. It’s easy to do.

Wes Moss [00:32:54]:
So we’d love to hear from you. You could find us@your wealth.com that’s why o u r your wealth.com have a wonderful rest of your day.

Mallory Boggs (Disclaimer) [00:33:10]:
This is provided as a resource for informational purposes and is not to be viewed as investment advice or recommendations. This information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. The mention of any company is provided to you for informational purposes and as an example only and is not to be considered investment advice or recommendation or an endorsement of any particular company. Past performance is not indicative of future results. Investing involves risk, including possible loss of principal. There is no guarantee offered that investment, return, yield or performance will be achieved. The information provided is strict an opinion and for informational purposes only and it is not known whether the strategies will be successful. There are many aspects and criteria that must be examined and considered before investing.

Mallory Boggs (Disclaimer) [00:33:58]:
This information is not intended to and should not form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment, tax, estate or financial planning considerations or decisions. Investment decisions should not be made solely based on information contained herein.

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This information is provided to you as a resource for educational purposes and as an example only and is not to be considered investment advice or recommendation or an endorsement of any particular security.  Investing involves risk, including the possible loss of principal. There is no guarantee offered that investment return, yield, or performance will be achieved.  There will be periods of performance fluctuations, including periods of negative returns and periods where dividends will not be paid.  Past performance is not indicative of future results when considering any investment vehicle. The mention of any specific security should not be inferred as having been successful or responsible for any investor achieving their investment goals.  Additionally, the mention of any specific security is not to infer investment success of the security or of any portfolio.  A reader may request a list of all recommendations made by Capital Investment Advisors within the immediately preceding period of one year upon written request to Capital Investment Advisors.  It is not known whether any investor holding the mentioned securities have achieved their investment goals or experienced appreciation of their portfolio.  This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.