Personal Finance Special

SPEAKER_1 (0:01)

This is InvestTalk from KPP Financial, helping investors make sense of the markets one day at a time. And now, here are Justin Klein and Luke Guerrero.

Justin Klein (0:16)

Good afternoon, fellow investors, and welcome back to a special edition of InvestTalk. Today, while you're listening to this, Luke and I will be at a wedding. And so, we decided to pre-record a special episode on personal finance. There's a lot of topics to unpack, and we're going to get to many during this hour. But with that in mind, I want to remind all of you to go to investtalk.com and sign up for our retirement summit coming up on October...

Is it the 24th? It's the 24th.

Luke Guerrero (0:54)

24th.

Justin Klein (0:55)

If I'm remembering correctly, in Irvine, California. So, I encourage you. We're more than half full. So, the spots are filling up fast. So, make sure you go and check that out. Well, let's get started, Luke. The first topic we're going to discuss today is kind of a cross between personal finance and investing, and it's really about dividends and dividend yields.

When people get to retirement, there are a lot of them are focused on income. How do I get income? Dividends is part of that. Maybe it's bond interest. But the problem with today's market is that dividends have declined pretty dramatically. Across the US stock market, the average yield is only around 1 percent.

So it's difficult to get that level of income just by dividends alone, especially when you're looking at what sectors pay dividends or high dividends. It's pretty narrow. A lot of those can be value traps. How do you think investors should think about collecting income from their equity holdings in this new environment?

Luke Guerrero (2:12)

Well, this is something that I've actually preached for a while because I never understood this obsession with dividends. I get it. I think a lot of people think that when they get dividends, it's actually new money coming to them when in reality, it's cash leaving the company and theoretically speaking, the value of your shares should adjust by the amount of cash that leaves the company. It's not always one for one, but that certainly does happen. But then people are also trading in this defined income stream and giving up the optionality of when they want to have a taxable event. I've always told people, you can structure a portfolio not around dividends and still get income for it, by divesting from your long-term capital gains, meaning you choose when the income stream comes to you, and you choose when you're incurring that taxable event. That has, I think, over the past couple decades, become something more on the forefront. The reason being is before the 90s, you have to remember, not a lot of share buybacks, because it was viewed in Washington and by regulators as trying to manipulate stocks.

A lot of that changed in the 90s, and so as you're seeing this progression, I imagine that the traditional dividend income focused portfolio is definitely going to continue to be less and less prevalent.

Justin Klein (3:25)

Yeah, a lot of people don't know that this is actually a byproduct of what I believe was under the Clinton administration trying to limit executive pay. And so they, instead of just paying straight salary, a lot of companies started to give stock-based compensation to kind of make up for the difference. And what that did was really incentivize these executives to kind of maneuver for more short-term gain when it comes to earnings per share, etc. And so money has flown more towards those stock buybacks since then as opposed to the dividends. That's why you continue to see dividends plunge to an all-time low. But when it comes to the buybacks, those continue to move closer to an all-time high. And that's actually where most of the return of capital shareholders is coming from now. Total yields were roughly about 2.5% in 2025, with more of it coming from the buybacks.

About 1% dividend, about 1.5% from a buyback.

Luke Guerrero (4:37)

Yeah, I think the critical thing to remember too, lastly, is that the difference between dividends and buybacks is one tends to be timely and more stable. The other obviously open to market forces and when companies depend to decide to buy back shares. So a lot of things obviously changing. It doesn't mean you still can't get income from your strategy. We're headed into a short break.

Please remember, you can call any time at the InvestTalk voice line.

The number is 888-99-CHART.

SPEAKER_4 (5:17)

This is a special InvestTalk best of caller questions compilation program. Remember, the InvestTalk phone lines never close. Please call with questions, 888-99-CHART.