IFB177: Unemployment Benefits and Roth IRA, Coca-Cola and Dividend Aristocrats

In this listener Q&A episode, Dave and Andrew tackle some key, top-of-mind topics that investors are thinking about during this post pandemic time:

  • “Can my daughter contribute her unemployment benefits to a Roth?”
  • How Dave and Andrew feel about Coca Cola’s stock
  • What to do when facing 52 week highs or 52 week lows

The episode ends with a deeper analogy about how to think about valuation for stocks like Coca Cola, and is worth the listen on its own for that.

To get an entire overview of the basics of valuation, be sure to subscribe for the free 7 Steps to Understanding the Stock Market ebook at stockmarketpdf.com.

Announcer (00:02):

I love this podcast because it crushes your dreams and getting rich quick. They actually got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast led by Andrew Sather and Dave Ahern. Step-By-Step premium investing guide for beginners. Your path to financial freedom starts now.

Dave (00:33):

All right, folks, we’ll welcome to the Investing for Beginners podcast. This is episode 177 tonight. Andrew and I are going to answer a couple of great listener questions. And I’m going to go ahead and turn over my friend, Andrew. And he’s going to go ahead and read the first question.

Andrew (00:48):

Yeah, let’s give it a whack. So this question comes from Anthony. He says Andrew and Dave first, let me thank you both for starting me down the personal investment path. I’ve been a subscriber for about a year and binge listened to all the old podcasts. I’ve read numerous suggested finance books and found other podcasts that have added a positive or contrary opinion. I am much more confident as an investor, and I owe it all to your program. Be proud of your ability to help others. That feels good to read. Thanks for reaching out and saying that he continues, and he says my questions related to COVID-related unemployment benefits and retirement accounts.

Andrew (01:27):

My daughter’s 18 years old lives under my roof. And as a senior in high school in March, she was laid off in September. The gym reopened, and my daughter worked limited hours. She filed for unemployment in March and has been receiving unemployment benefits. I expect her to earn about 4,500 from her employer for 2020, but she will also receive about $7,000 from unemployment benefits. And he says, I have been paying all of her bills, and her money has been occurring in the savings account. If an emergency assumes the above are names of $4,500, is she eligible to contribute the $6,000 max to a Roth IRA? I know the unemployment benefits will be taxed as income but does the unemployment benefit count as income that can fund a retirement account? I don’t want to do anything illegal, and I cannot seem to find any answers on the web. Thanks in advance for any advice you may provide.

Dave (02:22):

So, yes. All right. So that’s a very interesting question. And thanks for reaching out, Anthony. So here are, here are some answers to it. Yep. So let’s start with your daughter’s income and whether she can contribute to an IRA, a Roth IRA, or not. The quick answer is yes; anybody can earn any eligible wages to contribute to a Roth IRA at any age. So whether she’s six months old or whether she’s 18, she could contribute to the Roth IRA. So any earned income that she has, you guys can contribute to that at any point. So there’s that part of the question. So up to the match, if she has $6,000 of money earned from her job. She can do it of the other part of the question with the unemployment benefits that, unfortunately, you can not contribute to an IRA.

Dave (03:19):

IRAs are meant to be retirement accounts that we put earned income in, and because they are unemployment benefits, the IRS looks very unfavorably upon that. So no, unfortunately, you will not be able to put any of those monies into a Roth IRA. I think that kind of, I guess, answers that question and something that I guess I was thinking about while we were talking about this question before we came on the air. If you are ever in doubt of finding some answers, and maybe you go to the Google machine, and it’s, it’s not giving you what you want to know, pick up the phone and call your bank. They will be able to answer those questions for you. They are smart people, and they’re there to help you. And I know that when I worked at Wells Fargo, there were lots of questions, again, kinds of questions that we would get all the time. Just about any banker who works at a bank will know the answer to these questions. And there’s no shame at all in calling and asking them because what they’re there for is to help. And of course, you can reach out to Andrew and me at any time, and we’ll do our best to answer the question as well. But I hope that kind of answers the question. Did you have anything you wanted to add, sir? Andrew,

Andrew (04:36):

Did you know that Robin Hood doesn’t have a customer service number?

Dave (04:40):

Seriously? I have a hundred percent serious. No, I did not, but I’m not going to, I’m not going to lie. I’m not that surprised given, especially given lately the troubles that they’ve had. Can you imagine if they had one who exactly,

Andrew (04:59):

You can call your banker unless you have a Robinhood account, in which case switch over to a Schwab or fidelity or somebody

Dave (05:08):

Please. Yeah, I would; I would second that I can; I can vouch for both Wells Fargo in Schwab is being very customer-oriented and very customer friendly for sure. So I would recommend that. So those are my thoughts. All right. Let’s move on to the next question. Hey, Andrew, I’ve gone through about 30 episodes of your podcast, love it, and have done about three months of research, figuring out my financial commitments and where it can feasibly go with my investment budget. I hope it’s okay. But I quickly think about investing my tax return and just doing it again in a dividend aristocrat. And I have Matt Coca-Cola. How do you feel about 52-week highs and lows? Just wanting to invest in it in a restaurant and when I have enough money to throw at it, what are your thoughts, Andrew? What are your thoughts?

Andrew (06:00):

Yeah, so let’s take that in three different parts, Dave, so maybe we can start with thoughts about Coca-Cola in general. I think it’s a stock that a lot of people might think about. It was one that was Warren Buffett’s best investment. And when I think of customer loyalty, I think there are not many companies that have the kind of customer loyalty that a Coca-Cola would have, but at the same time, when I look at the Coca-Cola stock today, it’s, it’s trading pretty expensively. And even after the pandemic, it’s still a pretty expensive wall after it crashed like everything else. Street’s implying an 11 to 12% growth. And so I have troubled me; I have trouble saying that I would be comfortable investing in Coca-Cola and expecting it to grow by double digits for the next ten years, particularly considering how much growth has slowed down over the past seven.

Andrew (07:11):

Yeah, I would; I would agree with that. I think Coca-Cola is a big brand name that just about everybody in the world is probably familiar with, and they’ve built a fantastic business. And I know, as you mentioned, Warren buffet has derived quite a bit of wealth from his investment at Coke, but at this point in the game, it seems like they are a mature company and their best days, I wouldn’t, I don’t want to say are behind them cause we never really know. But I think right now it’s not a vehicle that’s going to drive a lot of growth in it. Looking at one of our favorite websites, quick fs.net, and their revenue growth over the last ten years is 1.9%. And that doesn’t scream a lot of encouragement for growth. Now there is a dividend aristocrat. They’ve been paying a dividend for a very long time.

Dave (08:12):

The dividend is certainly safe, but if you’re looking for a combination of growth in the company and growth in the dividend, I don’t know that this is necessarily the best choice. I guess that’s kind of my thought on the company. I know, you know, a little bit about the history of the company and I think it’s I don’t know, I, I just worry that maybe this is not going to be a longterm grower and if you’re going to put a substantial amount of money into it, I think there might be better options. What do you think?

Andrew (08:46):

Yeah. And I like the points you brought up a company like Coke, it would be a good investment, and I would consider a company like that, but only if the price reflected its growth prospects. So, you know, we could talk about whether it’s done all you want, but if we think about the bigger picture of, okay, this is a company that creates, so those and with all of the, it just seems like with every day that passes more and more people seem to be health-conscious. And over the last 10 to 20 years, we’ve seen a push towards that with nutrition facts, being put on restaurant menus and people just whether, you know, whether they’re, they’re buying a snake oil juice cleanser, or they’re buying actual, real, better food for them, people seem to be doing that. You could see it; you have the whole foods or any other place that emphasizes organic things.

Andrew (09:52):

So that as a trend, it is hard to believe that Coca-Cola will have the same kind of growth in the eighties and nineties, not to say it’s not going to grow. As you said, it has some fantastic brands; Sprite has a couple of energy drinks under its belt. Like it distributes all of those things are great things, but if you’re going to pay, if you’re going to buy a stock, that’s a slower grower, you’re going to want to pay a lower price. And so I look at the list with the dividend aristocrats, and it’s, I would say it’s, it’s very interesting because I look at this list and I see a wide variety of types of businesses. So, you know, and it’s not just Coca Cola, but I think the stereotype with big dividend payers is that they’re generally matured. And I don’t think that’s always necessarily the case, but this list has many companies that I would say fit into that, into that slot of being in an industry where it’s kind of hard to see where their next big growth is going to come from.

Andrew (11:07):

But I also see a stock right in here that I was looking at quite intensely, and I almost pulled the trigger last month. I see three stocks in my portfolio that are scattered throughout this list. And you have some stocks that arguably are still in the middle or middle to late stages of their growth and probably have 10, 20, 30 years of decent growth ahead of them. And they can grow the dividend along with that. So I like dividend aristocrats. I love the idea of buying a stock that grows over time grows those profits, which grows

Dave (11:54):

The dividend, which I’m able to reinvest and get double compounding the facts. But you have to be careful in the sense, you know. I guess we should also define, are we talking about, is this your first investment or is this something that, you know, you’ve been trying to build a portfolio for a while, so, you know, if you’re starting, I think you could pick any company and use that too, to get your feet wet? But when you start talking about investing significant amounts, a dividend aristocrat, just because it has the name or the title doesn’t mean it’s going to provide you the same results. And so I think it’s important to think deeply about the company or what the company has done and within this story, it’s in and how the world is moving and how it could grow over time. Because if it doesn’t grow over time, it’s not going to be able to grow your dividend over time. And if it can’t do that sustainably, then the end game is either they load up with debt until one day they can’t load up anymore, or they just cut that dividend. You see some serious, especially with that, the stocks in this list that have a reputation for growing a dividend. Once they cut the dividend, Exxon Mobil perfect example of that, you’ll see the stock crash quite a bit because investors don’t like that.

Announcer (13:22):

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Dave (13:32):

It’s funny that you mentioned Exxon because they have been beaten up in the markets over the last, I guess, five or six months. And for sure, with all the depression in oil prices that has hurt the company. And there’s been lots of conversation on the street is, but seeing it on the news a lot in the last couple of weeks about whether or not they’re going to be cutting their dividend, and as a dividend aristocrat, that has been one of their guiding lights, I guess, if you can. And if they do cut that dividend, that you will see that stock price crash like a rock that’s I guess the one thing that’s kind of been holding them up over the last, I don’t know, year or so since the oil, particularly since it will market has been so beaten up. And I guess there’ll be interesting to see what happens with all of that.

Dave (14:20):

Maybe before we go a little bit farther with this, we should talk a little bit about dividends a dividend aristocrat because those unfamiliar with that term would like to shed some light on that subject?

Andrew (14:33):

Yeah, it’s just basically a company who’s been paying a dividend for 25 years or more and not just paying the dividend, but paying a dividend that grows every year. So obviously that’s something that we try to look for. And I like looking at companies who are maybe not necessarily dividend aristocrats yet, but maybe companies with a history of 10 years, nine years, eight years, seven years, things that are not maybe as much on the radar with dividend investors, but still tend to have a lot of growth left in them. Those can be a good place to look, and you don’t have to combine yourself to a dividend aristocrats lists to get dividend aristocrats results.

Dave (15:18):

Yeah, that’s, that’s a great point. And that’s a very good idea. I hadn’t thought of that. So thanks for sharing that with us. That’s a very good idea. I know for B with the dividend aristocrats course, one of my favorite sectors is the finance area, of course. And because that area has been beaten up extensively and especially since the pandemic began, they have not recovered like a large part of the market has. And so there are a few financials in the dividend aristocrat field that have been smacked down, Aflac being one in particular. I don’t know that it would necessarily invest in it at this particular time. They have some struggles ahead of them at the moment. More unrelated to COVID than just business issues that they’re going to have to work through.

Dave (16:14):

It’s nothing drastically structurally dangerous, just a large part of their revenue comes from Japan, and they have; it’s a good thing, but it’s not a good thing. The good thing is they are a market leader in Japan in that part of the industry, which is a great thing. The bad thing is they’ve kind of saturated the market, and there’s probably not as much growth available in that Avenue. So they might have to think of other ways to generate more revenue from that part of the world. So that, I guess that’s going to be something that they’re going to they’ll figure it out, but it’s something that’s going to take them a little bit of time. And so I think that’s why wall street is reduced to their value, if you will, and along the lines right now. So that’s, I guess, one of my thoughts about that anyway.

Andrew (17:09):

Yeah. The finance industry is tough right now, especially with the low-interest rates, but you know, there have been a few, you’ve, you’ve picked a few successfully, but I would say in the aggregate, it’s a very tough space to be in. I do want to answer the other part of the question. He mentioned the 52 weeks high, 52 weeks high, 52 week low. What are the thoughts on that? To define that that’s simply 52 weeks high would be when a stock is trading at its highest. It’s been in the last 52 weeks, same on the flip side with the 52 week low. And you know, for me, I, I don’t know. I like to,

Andrew (17:50):

I like to buy a stock when it’s below its 52 weeks high because it makes me feel like I’m getting a good deal or even if it’s close. So it’s 52 week low. It makes me feel like I’m getting a good deal. But if you think about it intelligently and rationally and without emotions, a 52 week high or 52 weeks low has no bearing on reality. It has no anchor to it. It’s just literally a random point in time that we’re choosing to examine. And the stock happens to be training at a certain point. So for me, I’ve, I’ve moved away from looking at that, and I’ve gotten a lot more comfortable buying a stock close to its 52 weeks high. Because if you think about, if you have a great business and it’s a business that’s able to grow year after year after year, whether that’s because it’s a market leader, whether it’s because it’s in a market that’s growing and the industry is growing, the economy is growing.

Andrew (18:54):

It’s a very strong industry, or it’s expanding, it’s going into other markets. It’s going into China, Japan, India, and any of those things make, make the company grow well. If you think about it outside of recessions, you’re not going to have a period where the stock shouldn’t train at its 52 weeks high because that’s what businesses do, right? Businesses grow as the business grows. So does the stock price. And so it’s a very long-term thing. It takes a long time, and it, it, it can be bumpy on the way. That’s why we start to see these things like 52 weeks high of 52 week low metrics that get popular and get widely used and thought of, but if you really break it down, the stocks will be trading closer to a 52 week high than not. And if, if it is, if it’s always trading near a 52 week low, that means the business is shrinking.

Andrew (19:56):

And it’s probably not a good investment most of the time. But knowing that and knowing how a business should grow over time, its value should grow over time. The stock pressure, follow it over time. It’s going to be very hard to pick good companies that are growing and not pick them at a 52 week high. And that’s just if you slow down and think of it logically; that’s the conclusion you have to come to. And so you got to shake that idea that I have to stay away from a 52 week high because that’s just not the case at all.

Dave (20:33):

Yeah. I like, I like those ideas. The 52 weeks high and a 52 week, Whoa, for I don’t honestly pay a whole lot of attention to them. What I think about when I think about those, and I Like the ideas that Andrew was telling us about. I think those are really good ways to think about it. Mohnish Pabrai one of my favorite investors. He talks a lot about the 50 52 weeks low as something that he uses to screen for stocks. In his mind, when he thinks about a 52 week low, he thinks he feels like that that could be an opportunity to find a company that’s undervalued. And he uses that as part of this screening process. In theory, that’s probably not a bad idea for sure to think about that because you could find opportunities in that realm. I’m not necessarily thinking that he’s going to buy companies that are always at 52 weeks. Well, but I think it’s probably not a bad place to, you know, look for those rocks that you want to turn over to try to find investment ideas.

Dave (21:40):

The other thing that I think about that I read about somewhere in the past was looking at the range between the 52 weeks high and a 52 week low. And if you see a company with a narrow range, and I’ll use an example, let’s say a company has traded between $20 and $35. That’s a pretty narrow range. And when you see a company that’s trading between a narrow range like that, it, to me, it indicates that there’s maybe not a lot of growth opportunity in a company could also indicate too that there’s not a lot of volatility in a company to which maybe some people would enjoy. Then, I guess the growth aspect of it is that if you do not see a wider range, it doesn’t have as high a ceiling as it’s low.

Dave (22:30):

And that’s something I think, to think about as well. When you think about the 52 weeks high and low, especially now, we’ve seen some pretty extreme lows when we have seen this year. We’ve also seen some pretty drastic highs. I would argue that a Tesla probably trades above their 52 weeks high about every other day, but that’s a whole other conversation, but it’s interesting to think about. And I think it’s; it’s kind of like for me, it’s like charts. It’s interesting to look at, but I don’t base a lot of decisions on either one of those ideas, the 52 weeks high or low,

Andrew (23:11):

I guess we, we, we could take some time to be clear too. You know, when I, when I buy at a 52 week high, I am still considering it to be buying cheaply or buying at a discount to its intrinsic value because I’m looking at the value of its future cash flows. And that’s how I’m determining how cheaper, how Expensive something should be. So, you know, when I mentioned that Coca-Cola is trading at 11%, 12% growth implied that’s based on valuation Metrics. And so I think The easiest way to think about it is the simplest way I can try to conceptualize it is with the price to earnings ratio because that one’s pretty simple. And, you know, with free cash flows, it’s tied to probably startings earnings are tied to free cash flow. So everything kind of revolves around that. I feel like the earnings growth, that’s how the stock prices grow, and that’s been pretty, that’s been shown pretty much. So if you look at like the average of PE ratios over the very, very term, it’s been around 15, and that’s for all sorts of stocks in the S and P 500, all sorts of years that we look at. So when a stock trades below that, you can generally say that you’re going to get a good deal, but, you know, that’s what the caveat that the business also grows sufficiently.

Andrew (24:45):

If a company is trading above that, it could be expensive unless the growth is that much better than all the other companies around them, then it might be cheap. So that’s kind of the way you have to look at cheap versus expensive. It’s not a chart thing. It’s not a 52 week high, 52-week low thing. It’s not a, Hey, I’m buying this because it’s priced at $12 while all the other stocks like Apple or price of the $120. It’s not about that nominal price value either. It is about what the business earns, and there are varying degrees of that. And it’s not as simple as just looking at a PE ratio and the growth, but that’s a general idea. And that’s why a company like Coca-Cola looks expensive right now. In contrast, some other companies on this list, especially based on some of the growth drivers that they’ve had lately, might not be as expensive and look cheap.

Dave (25:42):

Yeah, that’s, that’s a great analogy. And I love the idea of comparing the price to earnings ratio, the free cash flow, and talking about how those are tied to each other and how they’re tied to the company’s performance. When we’re talking about 52 week high and 52-week lows, we have to remember that that’s only looking at the stock price and the stock market, and the price does not always equate to what the company is worth and think about. Think about when you buy a car when you go buy a car, most of us know how much a particular car is worth that we want to go by. And we, when we go to the dealership, we’re looking for value. We want to buy a car, that is, we think it is worth 20,000 and the car dealer is asking 25 for it.

Dave (26:41):

And then if there a way, if during our air quote negotiations for the car, we can talk them into charging us 18,000 for it. Then we’re going to feel like we got a deal that we got a discount. We got more value than what we paid for. And when we’re talking about stocks and looking at and investing in companies, that’s really what we’re looking at. We’re looking for companies worth more than we’re going to pay for them because the idea is that when you pay for that company less than what it’s worth, it’ll grow into that value. And you will earn that extra money as well as going beyond what it’s worth. Because the thing about the stock market, we always have to remember that it’s a voting machine in the short term. And in the term, it’s a weighing machine, which means that in the short term, it’s only going to, it’s, it’s going to raise the prices of things that are very popular, that people are always paying attention to.

Dave (27:39):

When that spotlight drifts off those companies, then it’s going to be more about what the company is doing, and less attention is going to be paid to it. So generally, the price returns to normal; it reverts to the mean if you will. And really, so when we’re talking about 52-week highs and lows, that’s just based on price only. It has no other idea of what the value of a particular company may or may not be. And all the things that Andrew was talking about with the price to earnings and free cash flow and the relationship between all those things all have to do with the company’s performance. And that is ultimately more important than what the 52 weeks high or low of the particular company might be. It’s not bad to look at it and have a reference point again, but as far as buying it, just based on that particular thing, I don’t think that that’s probably the greatest strategy to go with, but I think the more of the things that we’ve talked about along the way of our podcast will benefit you in the long run far more.

Dave (28:48):

And I think that’s one of the things that we, I guess, always kind of kept to try to keep in mind, or we’re talking about the stock market is we’re not buying a ticket, we’re buying a company, and it has to be our focus.

Andrew (29:00):

So, so true. Yeah. Fantastic words.

Dave (29:03):

All right, folks. Well, that is going to wrap up our conversation for this evening. I wanted to thank the two folks for sending us those great questions. Thank you again for taking the time to write to us. And I hope you find our answers satisfactory and help answer your questions. If you guys have any other questions out there, please do not hesitate to send them to us. We love answering these on the air, and we love helping you guys any way that we can. So without any further ado, I’m going to go ahead and sign us off, go out there and invest with a margin of safety emphasis on safety, have a great week, and we’ll talk to you all next week.

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