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Stock Market Today: Dow Dashes to Best Gain Since November 2020

News about the conflict in Eastern Europe was contradictory as the trading week came to a close, but markets surged as Wall Street grasped for good news.

On Friday, Russian troops reportedly were closing in on the Ukrainian capital of Kyiv. Yet on the same day, the Kremlin said Russian President Vladimir Putin had agreed to send a delegation to the Belarusian capital of Minsk to negotiate with Ukraine.

  • SEE MORE The 22 Best Stocks to Buy for 2022

Chinese President Xi Jinping reportedly also gave a nod toward a peaceful resolution, saying “China supports Russia and Ukraine to resolve issues through negotiations” after a conversation with Putin, according to state-owned CCTV.

But some of Friday’s bullishness might also have come from changing expectations for Federal Reserve action this year.

“Wall Street anticipates central bank reluctance to go overly aggressive with tightening monetary policy, so they could provide a cushion for a growth hit that will stem the Russia-Ukraine developments,” says Edward Moya, senior market strategist at currency data provider OANDA.

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Back on the homefront, America’s core personal consumption expenditures price index showed consumer spending up 5.2% in January, according to the Commerce Department. That was slightly better than expectations for 5.1%.

“The strong consumer numbers come at a time when many economists were worried about an economy that was weaning itself of government stimulus in the latter part of 2021, and whether the consumer would be able to carry the torch in 2022,” says Peter Essele, head of portfolio management for Commonwealth Financial Network.

The Dow Jones Industrial Average – led by advances in Johnson & Johnson (JNJ, +5.0%), 3M (MMM, +4.7%) and Procter & Gamble (PG, +4.3%) – jumped 2.5% to 34,058, its best performance since a roughly 3% gain on Nov. 9, 2020. The S&P 500 (+2.2% to 4,384) and Nasdaq Composite (+1.6% to 13,694) also posted sizable gains, putting both indexes into positive territory for the week.

  • SEE MORE 5 Super Stocks to Stave Off Sizzling Inflation

Still, the impressive market comeback of the past couple of days doesn’t mean the market is out of the woods yet.

Yesterday, the CBOE Volatility Index, or VIX, crossed above 30 amid Russia’s invasion of Ukraine. “VIX above 30 indicates that investors are unusually anxious about what comes next, and that they are hedging stock portfolios to protect against further declines,” say Michael Oyster and Steven Sears of asset-management firm Options Solutions. “Market fears have abated somewhat, with the CBOE VIX below 30, but as it remains near the highest 10% level of all time, the options market is hardly signaling an all-clear.”

YCharts

Other news in the stock market today:

  • The small-cap Russell 2000 popped 2.3% to 2,040.
  • U.S. crude oil futures slumped 1.3% to finish at $91.59 per barrel, but still ended the week up 1.5%.
    Gold futures shed 2% to settle at $1,887.60 an ounce, bringing its weekly decline to 0.6%.
  • Bitcoin continued clawing its way back to $40,000, rising 1.7% to $39,130.32. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.)
  • Etsy (ETSY) stock soared 16.2% after the online marketplace reported top- and bottom-line beats in its fourth-quarter. For the three-month period, ETSY brought in earnings of $1.11 per share on $717 million. While the company did offer lower-than-expected current-quarter revenue and gross merchandise sales guidance, Chief Financial Officer Rachel Glaser said this was due to tough year-over-year pandemic-related comparisons. “ETSY is one of few names surviving the pandemic online bubble with initiatives to drive top line at core brand and the subs,” says Needham analyst Anna Andreeva, who reiterated a Buy rating on the retail stock.
    Foot Locker (FL) sat out today’s broad-market rally, shedding 29.8% after earnings. In its fiscal third-quarter, the athletic apparel retailer reported adjusted earnings of $1.67 per share on $2.34 billion in revenue, higher than the $1.44 per share and $2.33 billion expected by analysts. However, FL also warned that revenue will likely be down between 4% and 6% and same-store sales will contract 8% to 10% in fiscal 2022. This is due in part to the company selling less products from Nike (NKE). “In Q4 ’21 Nike represented 65% of vendor spend which FL plans to reduce to 55% moving forward,” says CFRA Research analyst Zachary Warring (Hold). “We do not like the positioning of FL as companies shift to direct-to-consumer and they continue to have higher exposure to malls but see limited downside as FL currently trades at 6.0x 2023 EPS and a clean balance sheet.”

Where Can Opportunists Put Money to Work?

In times of market crisis, some people look for protection, while others scout out opportunities.

  • SEE MORE 7 Energy ETFs for Rising Oil & Gas Prices

Rhys Williams – chief strategist at Spouting Rock Asset Management and a former journalist at the Moscow office of The Sunday Times – has a dour outlook on the geopolitical situation:

“Putin seems to have made his choice, and it looks like he has settled on regime change,” Williams said, adding that in the medium-term, he’s not quite sure how business gets back to usual.

But there are some market implications for investors looking to buy on this dip.

“I think Big Tech will get a bid after a significant correction, as they have a lot of cash and consumer staples-like qualities. They also don’t lose much business in Russia and the Ukraine relative to overall revenues,” he says. These 12 stocks represent some of our best ideas in the broader sector, though specific industries such as cybersecurity are becoming a trendy pick.

Rhys also likes higher-dividend-yielding stocks, “as perhaps this caps interest rates for a while.”

You can start with this nine-pack of stocks dishing out 5% or more in annual income – though more importantly, they haven’t been selected only for their large headline yields. These picks broadly feature conservative payout ratios, stronger balance sheets and business models that generate predictable cash flow, meaning their dividends aren’t just generous … they’re sustainable over the long haul.

  • SEE MORE 2022’s Best Mutual Funds in 401(k) Retirement Plans

Stock Market Today: Russian Invasion Sparks Roller-Coaster Day for Stocks

News of Russia’s full-scale invasion of Ukraine sent stocks plummeting out of the gate today.

  • SEE MORE 10 Biggest Losers in the S&P 500 This Year

“We’re clearly in risk-off mode in the market right now given the uncertainty regarding the military operations in Ukraine,” says Brian Price, head of investment management for Commonwealth Financial Network.

“There seems to be some element of surprise that the events have escalated so quickly and I would expect that we’ll continue to see volatility in the near term.”

Indeed, after the Dow Jones Industrial Average flirted with correction territory and the Nasdaq Composite slipped below its bear-market level on an intraday basis, the major market indexes reversed course as President Joe Biden announced a new round of sanctions against Russia, including freezing trillions of dollars in Russian assets, and said he is sending additional U.S. troops to Eastern European countries that are in NATO.

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By the close, the Nasdaq – which was down 3.4% at its session low – was up 3.3% at 13,473. The S&P 500 Index also finished in positive territory, gaining 1.5% to end at 4,288. The Dow, meanwhile, ended with a 0.3% gain at 33,223, after trading as low as 32,272 earlier. 

YCharts

Other news in the stock market today:

  • The small-cap Russell 2000 joined in on the roller-coaster ride, ending the day up 2.6% at 1,995, after being down as much as 2.6% in intraday trading.
  • Gold futures gained 0.8% to settle at $1,926.30 an ounce, their highest finish in 17 months.
  • Bitcoin rose 2% to $38,466.10. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.)
  • Moderna (MRNA) was a big winner today, jumping 15.1% after earnings. In its fourth quarter, the drugmaker reported adjusted earnings of $11.29 per share on $7.2 billion in revenue, exceeding the $9.90 per share and $6.8 billion expected by analysts. The company also said it sold $17.7 billion of its COVID-19 vaccine and expects to sell at least $19 billion in fiscal 2022.
  • Booking Holdings (BKNG), on the other hand, slumped 7.1% after its quarterly results. The online travel reservation company reported adjusted earnings of $15.83 per share and revenue of $3.0 billion in its fourth quarter, beating out analysts’ expectations for earnings of $13.30 per share on $$2.9 billion in sales. The company also said gross travel bookings for the three-month period were up 160% year-over-year to $19.0 billion. Still, Booking CEO David Goulden warned of “a potentially volatile environment with high COVID infection rates in some part of the world and geopolitical uncertainty that could impact our business, especially in Europe,” in the company’s earnings call. UBS Research analyst Lloyd Walmsley maintained a Buy rating on BKNG. “Looking ahead, we see scope for a stronger-than-expected recovery in 2022 and into 2023 in terms of room nights and bookings which we think would flow through at attractive incremental margins,” he writes in a note.

One Way to Hedge Geopolitical Risk

One way to hedge international turmoil: commodities. This is according to a team of Goldman Sachs Commodities Research strategists.

“With news of Russia’s invasion of Ukraine emerging, commodity markets have rallied aggressively, acting as the clear geopolitical hedge of first resort,” they write.

This was seen in the price action for several commodities today, most notably U.S. crude oil futures, which topped the $100 per-barrel mark in intraday trading – their first move above this level since 2014 – before settling up 0.8% at $92.81 per barrel.

  • SEE MORE 6 Sturdy Defensive Stocks to Buy for 2022

And prices are likely going to head even higher, with many experts predicting oil could hit the $125 per-barrel mark. “Uncertainty around potential sanctions is beginning to create a potential supply shock,” the team says. “In our view, until the uncertainty around the rapidly escalating situation is resolved, commodity price risk remains skewed to the upside.”

Not only would a continued rise in oil prices spell good news for traditional energy stocks and energy exchange-traded funds, but also master limited partnerships (MLPs). These firms, which are largely responsible for pipeline infrastructure and storage facilities, offer both exposure to the booming energy market and high dividend yields to boot.

  • SEE MORE 2022’s Best Mutual Funds in 401(k) Retirement Plans

Secrets of Sustainable Investing

Amy Domini is founder and chair of Domini Impact Investments. She has authored several books, most recently Thoughts on People, Planet & Profit.

Kiplinger: You are a pioneer in what is often called socially responsible investing (SRI). How and why did you first come to marry your sense of moral responsibility and fairness to investing?

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Domini: My first real job was as a stockbroker. I started asking clients, “Are there industries that you’d rather not invest in?” I was astonished that most people said yes. They might want to avoid tobacco companies, for instance, because their brother died of lung cancer. Over time, I saw the power in the relationship between investors and society. Do you believe that investors should be involved in this conversation? If the answer is yes, then you’re my people.

Investors today hear a lot about ESG, or environmental-, social- and governance-based investing. Is that different from socially responsible investing or values-based investing? No, it is just a battle of vocabulary. I think that ESG has a precision to it that appeals more to conventional analysts on Wall Street. But we all make selections as to what to invest in based on people and the planet.

What is the best way for investors to integrate ESG into their portfolios? The simplest way is to purchase an SRI or ESG mutual fund. You will join thousands of other investors to raise issues with a company’s management. You multiply your power when you go that route. But a lot of people enjoy getting to know companies and making decisions that suit them personally. I would urge them to focus on companies that will improve people’s lives.

The criticism of this kind of investing for years has been that you’d have to sacrifice returns. What’s your opinion? It hasn’t been borne out by the facts. Embedded in that assumption is the idea that you should try to have as big a selection of investments to choose from as possible to maximize performance and that restricting yourself to ESG choices will limit returns. But every single small-cap portfolio manager invests only in small-cap stocks and still promises to outperform. And every single value portfolio manager invests only in value stocks and still promises to outperform. So I feel that there’s a different set of rules when it comes to our investing in ESG companies.

Imagine I am comparing two companies in the same industry. The first has a lot of product safety recalls, and the second one doesn’t. By investing in the second company, I’ve avoided trouble. That’s rule number one for making money: Avoid trouble.

Looking at a company’s potential from an E, S or G lens, which of those offers the most promise from an investment standpoint today? I think the S is most important because it involves such a broad set of issues. The social lens evaluates how the company interacts with stakeholders, including suppliers, customers, employees, communities and shareholders. Does a company have problems such as child labor in the supply chain? Does it provide training for its workforce? These kinds of questions help us understand the quality of management. I think every conventional investment adviser would agree that management quality is the most difficult thing to assess when you’re analyzing a company.

What do you see next for ESG investing? Mainstreaming and better information flow. It is a majority opinion now that ESG investing has a role to play. That will put more pressure on regulators to provide a systematic framework for information that is comparable from one company to another. And with that information will come pressure to show the impact on people and the planet.

There was no such thing as a corporate sustainability report when I got started. So there have been changes, but this level of public information is the big one.

  • SEE MORE 5 Great Green Stocks Making a Direct Impact

Investors have been working for decades to define ESG criteria that best translates into corporate risk or opportunity. How can we make sense of all of the ratings and raters that are proliferating today? Years ago, I started a rating company called KLD, which has since been acquired. I think in the early stages of a new manager getting involved in this field, they want a yes or no–can I buy the stock or not? And this has driven the absolute scores from rating agencies such as MSCI and Sustainalytics. But knowing how they got that top-line score helps you make a better decision about the company.

Most investors will do well by reading the corporation’s sustainability report. Already we see some annual reports that have a fulsome discussion of how the company has addressed the customer, the manufacturing process, the supply process, the environment through an ESG lens. And there is a way to put a monetary value on some of these benefits. We can imagine a time when this integrated reporting actually puts dollar values on ESG outcomes, but that’s a decade or two away.

In general, which investment vehicles would you recommend now? I’m pretty conventional. I like stocks better than bonds. I think you can have more long-term growth with stocks, but bonds have a role as a safety net. In this stock market, I prefer active management. We are entering a phase of very strong crosscurrents, including COVID and tensions between China and Taiwan, and it is potentially very scary. At this time, then, I prefer the nimbler approach offered by active fund managers; they can react more quickly to these challenges than a passively managed fund.

Anything in particular you like right now? I am optimistic about the future of the stock market. We have tremendous energy going into products that didn’t exist 10 years ago. I mean technology writ large, in healthcare, transportation and entertainment–even service industries. I don’t think that we are even near the middle of this innovation wave, let alone the end. And it is accelerating at an incredible pace.

Home improvement and home goods have been very strong in the last year or two. We’ve been nesting. We want a new rug. We want a new roof. But over the next period, I’m moving away from that home-focused theme. I also think that we’re all desperate for experiences and travel, even if it’s 30 miles up the road to an Airbnb. These are the areas I’m looking at right now in terms of opportunity sets.

If there was one thing you’d want readers to take away from this interview, what would it be? “Triple P” investing, for people, planet and profit. It is a phrase that cuts out all the noise and gets to the heart of our approach.

  • SEE MORE 5 ‘Blue Economy’ Stocks and Funds

How to Win With Game Stocks

In one of the most volatile episodes in stock market history, investors early last year took the shares of a company called GameStop (GME) on a wild ride that few would have expected for a business that’s mostly a brick-and-mortar antique, the gaming version of a chain of video stores. Its shares went on an adventure that echoed the characteristics of the video games on its shelves: fantasy, violence and a romantic quest for justice and vengeance.

  • SEE MORE The 12 Best Tech Stocks to Buy for 2022

In real life, however, GameStop has had a lousy year, losing money once again. But the rest of the gaming sector has taken up the mantle. It’s booming, becoming the backbone of the metaverse, a three-dimensional online environment that is likely the “next big thing” in consumer technology.

In 2020, partly because the pandemic kept Americans indoors, gaming revenues exceeded those of movies and sports events combined. Global gaming sales in 2021 are estimated at $178 billion and projected to rise to $269 billion by 2025. According to the consulting firm Accenture, one out of every three people in the world is a gamer. 

No wonder so many big tech players are investing in the business. In 2000, Microsoft (MSFT, $306) launched the game-playing console Xbox, and in 2014 the company bought Minecraft, a survival-themed game, for $2.5 billion; Minecraft now has 131 million active monthly users. In January, Microsoft announced that, pending regulatory approval, it will spend $69 billion to purchase ActivisionBlizzard (ATVI), which has 400 million gamers a month playing such popular titles as Call of Duty and World of Warcraft.

Trying to stay abreast, Sony Group, maker of the wildly popular PlayStation console, announced Jan. 31 that it was buying Bungie, the private developer of the Halo and Destiny franchises, for $3.6 billion. (Stocks I like are in bold; share data are as of Feb. 4.) 

  • SEE MORE 10 Metaverse Stocks for the Future of Technology

Amazon (AMZN, $3,153) entered the market in 2014 with the purchase of Twitch Interactive for $970 million. Twitch lets gamers livestream themselves to viewers, who can watch and comment. Twitch has about 8 million active users. It dominates the market, but competition is growing from such big players as Microsoft, with its entry Mixer; Alphabet (GOOGL, $2,866), with YouTube Live; and Meta Platforms (FB, $237), the former Facebook. 

Facebook, walloped by a disappointing revenue projection for the first quarter of 2022, has thrown in its lot with the metaverse. It’s an idea with roots in Second Life, a computer game Facebook created in 2003. When I was a State Department official, my avatar gave an interactive speech in 2008 with the avatars of pro-democracy Egyptian students. In the metaverse, you can go to concerts, hold business meetings where you are immersed in, say, a construction site or restaurant, or drop down onto a virtual football field and run a few plays. The key for investors is that the metaverse depends on technology developed for video games.

How to Get in on Game Stocks

The metaverse, with its promise of interconnected worlds, may be the next frontier for gaming, but for investors, gaming poses challenges. You could buy the tech giants because gaming is a growing part of their businesses, but recognize that it is dwarfed by, say, online retailing, cloud computing and advertising. And many of the best developers of video games are private firms, so you can’t invest in them. So, what are the best pure plays to take advantage of a craze that could still be in its infancy? 

Look first to the companies that make the games. Many games today are so sophisticated that they can cost as much to make as the most dazzling Hollywood films. Grand Theft Auto 5 required 250 programmers and other employees of Rockstar working for five years at a total expense of $265 million. That’s more than the films “Titanic” or “The Dark Knight Rises.” The investment paid off. GTA5 has grossed more than any movie ever made. 

Take-Two Interactive Software (TTWO, $175) owns the Rockstar label and has been gobbling up smaller developer firms, including Zynga (maker of FarmVille, a huge hit that was introduced as an app in 2009). Take-Two, with a market value of $18 billion, is solidly profitable, but shares have dropped about 20% in the past two years. With a market cap of $37 billion, well-managed, independent developer Electronic Arts (EA, $138), makes such games as Battlefield, The Sims and Madden NFL. It trades at a reasonable price-earnings ratio of 18. 

  • SEE MORE Can AI Beat the Market? 10 Stocks to Watch

Nvidia (NVDA, $243) makes semiconductors for a variety of sectors, but, as the world’s largest designer of graphic processing units, its chips are popular in video games, including those that create virtual environments for immersion in the metaverse. In its latest quarterly report, Nvidia reported that gaming revenues rose 42% and are approaching half of the company’s total sales. Still, shares fell by nearly one-third in the first three weeks of 2022, creating a buying opportunity. 

Other metaverse stocks were also caught in the undertow of fears of higher interest rates and falling valuations. With a market cap of $30 billion, Unity Software (U, $109), which operates a development platform for the software that powers complex games, fell in price by about half from November to January, despite a surge in revenues. Over the same period, Matterport (MTTR, $8), which captures the feel of interior space with its 3D cameras, dropped by two-thirds, even though analysts see revenues rising in 2022 from $109 million to $160 million. The company is still unprofitable, and its $2.6 billion valuation is lofty, but if you can tolerate risk, Matterport could be a good long-term investment. 

A few exchange-traded funds focus on gaming stocks. Global X Video Games and Esports (HERO, $27), with an expense ratio of 0.50%, was launched in 2019. Among the top holdings are NetEase (NTES, $101), a large Chinese developer, and Ubisoft (UBSFY, $12), a mid-cap French maker of such games as Rainbow Six Extraction and Just Dance. 

With expenses of 0.55%, Van Eck Video Gaming and eSports (ESPO, $63) dates from 2018, with a small portfolio similar to that of the Global X ETF. Both funds lean toward high-profile stocks such as Nvidia and Electronic Arts, but one notable highlight of the Van Eck ETF is NEXON (NEXOY, $20), a Japanese firm with an emphasis on the fast-growing Asian market. Unlike many other gaming companies, Nexon’s shares have been rising since last fall. Van Eck’s top asset is Tencent Holdings (TCEHY, $62), the giant Chinese social media company that is, by some calculations, the largest gaming business in the world through its online offerings. Tencent has suffered from Chinese government intervention, so there’s political risk to consider. 

Game stocks carry the likelihood of substantial returns – perhaps, if regulators allow, through acquisitions by giants such as Alphabet, Microsoft and Sony. And their prospects, unlike the plotlines of many of their products, are built on a real-life foundation. 

These stocks and funds stand to gain from the virtual-reality world known as the metaverse.

James K. Glassman chairs Glassman Advisory, a public-affairs consulting firm. He does not write about his clients. His most recent book is Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence. Of the stocks mentioned here, he owns Amazon, Microsoft and Nvidia. Reach him at [email protected].

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Leveraging the Tax Code to Minimize Your Tax Liabilities

As we head toward March, one of most dreaded times of the year approaches: tax season. Right now is the time when you’re inundated with tax documents, including a W-2 from your employer, 1099s from your side gigs, 1099-MISC statements from your online brokers, 1099-Rs for retirement income and more.

There isn’t much you can do now to reduce your 2021 tax obligations outside of contributing more to tax-deferred retirement accounts. That’s why the beginning of the year is the perfect time to adopt new strategies to minimize your tax obligations for 2022.

  • SEE MORE Is Your Stimulus Check Taxable?

All too often, your focus is on the rearview mirror – what you’ve already done and what you’ll have to pay. Instead, when you shift your focus to a proactive stance, you’ll reap the rewards throughout this year and into 2023, when you’ll file your taxes for this year.

As an enrolled agent – a professional who has earned the privilege of representing taxpayers before the Internal Revenue Service (IRS) – and a financial adviser, there are three strategies that I’ll share with you that have the potential to reduce your taxes in coming years. Of course, every situation is different and you may have other factors that cause your taxes to increase even if you adopt these and other tax mitigation suggestions.

Strategy #1: Maximize your tax-deferred retirement contributions

One of the most effective ways to reduce your tax liabilities is to increase your contributions to tax-deferred retirement vehicles, such as company-sponsored 401(k) or 403(b) accounts, government-sponsored Thrift Savings Plans (TSPs) or individual retirement accounts (IRAs). If you’re like many people, you’ve got room to increase your contributions before you hit the maximum allowable contribution.

If you’re in a 401(k) or 403(b) account, that limit is $20,500 for 2022. If you have a SIMPLE account, the limit is $14,000, while the limit for a SEP IRA is $61,000. If you are turning 50 in 2022 or are already older than 50, you can sock away more due to catch-up contributions, which are $6,500 for 401(k)s and 403(b)s and $3,000 for SIMPLE IRAs. There are no catch-up contributions allowed for SEP IRAs, because contributions can only be made by employers not employees.

For traditional tax-deductible IRAs, which are accounts that you establish for yourself, contribution limits are $6,000 a year with $1,000 extra allowed for catch-up contributions for those turning 50 and older in 2022.

Approaching your tax-deductible retirement plan contributions for the entire year in a strategic manner allows you to maximize your contributions while minimizing the impact on your budget. Here’s an example illustrated in Figure 1: Let’s say you want to increase your 401(k)contribution by 50%. If you can divide that over 26 pay periods, those additional contributions will be spread over a longer period of time, meaning that each contribution will be smaller than if you decided to take this action in the summer or in the fall, when you’d have fewer weeks remaining in the year.

Figure 1: Impact of a 50% increase in 401(k) contribution at different times of the year

Initial contribution Additional contribution Total new contribution 26 Pay Periods 13 Pay Periods 7 Pay Periods
$5,000 $2,500 $7,500 $96.15 $192.31 $357.14
$7,500 $3,750 $11,250 $144.23 $288.46 $535.71
$10,000 $5,000 $15,000 $192.30 $384.62 $714.29
$12,500 $6,250 $18,750 $240.38 $480.77 $892.86

You can see how starting early in the year offers a considerable advantage. In this case, increasing your contribution by $2,500 a year would only take additional payroll deductions of $96.15, assuming you’re paid every other week. Even if you wanted to increase your contributions by $5,000, you’d be left with a manageable deduction of $192.30 a week. However, the longer you wait, the higher the hill that you’ll have to climb in terms of the amount you have to contribute per pay period.

The more you contribute, the larger your tax savings, since 401(k), traditional IRAs, SEPs and SIMPLE IRA contributions are made with pre-tax dollars. Think of this strategy as a win-win, because not only do you save money on your taxes today, you’re also building a nest egg for tomorrow, when it’s time for you to retire. Of course, you will have to pay taxes on your contributions when you take money out in retirement.

Strategy #2: Invest in stocks with qualified versus ordinary dividends

Qualified dividends are taxed at more favorable capital gains tax rates, in contrast to ordinary or nonqualified dividends, which are taxed at ordinary income tax rates. Capital gains tax rates are 0%, 10%, 15% or 20%, in contrast to ordinary income rates, which can be as high as 37%.

Generally, if you hold dividend-paying stocks in taxable accounts – not retirement accounts – you’ll pay taxes at the qualified dividend rate, as long as you hold shares in the company that issues those dividends for more than 60 days during the 121-day period that starts before the day that a company’s dividend is recorded, which is also known as the ex-dividend date.

While this definition may seem complicated, there is method to the IRS’ madness – the intention of Congress was to reward long-term shareholders with a lower qualified dividend rate. This is why you must hold stock for a period of time to receive the preferential dividend rate.

  • SEE MORE 10 Most Tax-Friendly States for Retirees

The definition of an ordinary dividend, in contrast to a qualified dividend, is a dividend from certain types of stocks, such as real estate investment trusts (REITs) and master limited partnerships (MLPs). In practice, those stocks may have dividends that are taxed at lower effective rates, but there are many different factors that play into this distinction that are beyond the scope of this article.

In addition, money market funds and dividends paid by employee stock option plans are also ordinary dividends. Fortunately, you don’t have to do the math or know which is which as those will be automatically categorized on your tax statement by type.

To get around these issues and minimize your tax liabilities, it can make sense to hold qualified dividends in taxable accounts and stocks and other instruments with ordinary dividends in tax-deferred accounts, like qualified retirement plans, or in non-taxable accounts, like Roth IRAs.

Strategy #3: Consider investment-only variable annuities

Frequently overshadowed by other types of annuities, investment-only variable annuities offer an option to save money on a tax-deferred basis beyond other tax-deferred vehicles, such as 401(k)s or traditional IRAs. Unlike many other types of variable annuities, which have gotten a bad rap because of their high fees and complexity, investment-only variable annuities are fairly straightforward, provide a wide variety of investment options and carry reasonable fees.

An advantage of investment-only variable annuities, especially compared to 401(k) funds, is the wide variety of investment options available. These can be used to diversify retirement assets, as many 401(k) plans offer limited options in a few asset classes. You can use an investment-only variable annuity to invest in alternative investments or in asset classes that might not be offered within your company-sponsored retirement plan.

Investment-only annuities aren’t suitable for everyone. If you haven’t maxed out your company-sponsored retirement accounts, there’s not much sense in investing in this type of vehicle. However, if you have maxed out your company-sponsored retirement accounts and are looking for another place to stash savings that you can use to get a tax deduction, it might be worthwhile considering an investment-only annuity.

Like other types of annuities, investment-only annuities don’t offer liquidity. In other words, if you’re likely to need the money you’ve saved before you turn 59½, you shouldn’t invest in this type of annuity, because you’ll have to pay a penalty of 10% if you take the money out early.

In addition, contract language for annuities is quite complex and some of the provisions can be difficult to understand. Fees vary widely, so be sure to investigate all your options before committing to one of these products.

Securities and advisory services offered through Registered Representatives of Cetera Advisor Networks LLC (doing insurance business in CA as CFGAN Insurance Agency LLC), Member FINRA / SIPC, a broker/dealer and Registered Investment Advisor. Cetera is under separate ownership from any other named entity. Investment advisory services may also be offered through HBW Advisory Services LLC. LHD Insurance & Financial Services, HBW Insurance & Financial Services, Inc. dba HBW Partners and HBW Advisory Services LLC are separate entities, which do not offer legal or tax advice. CA Insurance license: 0C63007
This article is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.
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Fidelity Quality Factor ETF Flies Under the Radar

When the market gets rough, you hear a lot about a “flight to quality.”

In the stock market, that means companies that have a lower risk profile thanks to traits such as dependable earnings, strong balance sheets, plump dividends or lower-than-average trading volatility, for example.

  • SEE MORE The 22 Best ETFs to Buy for a Prosperous 2022

“Given the likely slowing industrywide for earnings growth in 2022, we think investors will benefit from a diversified basket of higher-quality companies,” says Todd Rosenbluth, head of ETF and mutual fund research at CFRA.

Fidelity Quality Factor ETF (FQAL) tracks a proprietary index designed to home in on stocks with a higher-quality profile than the broad market.

The index measures how efficient a company is at converting sales to cash, how much profit it generates with the assets invested by stock and bond holders, and how consistently it can generate positive free cash flow (cash profits left after investing to maintain and expand the business). The approach differs from that of funds that overweight a particular sector, say, or focus mostly on debt levels.

The exchange-traded fund has a higher expense ratio than many of its peers, but its returns are competitive.

With just under $260 million in assets – compared with billions for similar offerings iShares MSCI USA Quality Factor ETF (QUAL) and Invesco S&P 500 Quality ETF (SPHQ), for example – the Fidelity fund “is an under-the-radar quality ETF,” says Rosenbluth, with a “higher reward potential and less risk than its high-quality peers and the broader U.S. market.”


  • SEE MORE 7 Energy ETFs for Rising Oil & Gas Prices

How to Stay Mentally and Physically Fit in Retirement

Most people look forward to retirement as a time to relax and enjoy life after decades of hard work. What if ill-health and the effects of aging get in the way of realizing your dreams?

Fortunately, the right activities and treatment programs can help you maintain – or even improve – your physical and mental wellbeing. Here’s a look at the science behind how to keep yourself at peak condition in retirement.

Step 1:  Stay active with walking and light sports like golf

The evidence is overwhelming: Staying physically active as you age can help prevent illnesses such as heart disease, stroke, type 2 diabetes, some cancers, depression and dementia. A Harvard University study involving 12,000 people showed that just one hour of brisk walking each day can halve the impact of 32 obesity-promoting genes, a strong cause of many health disorders.

Those who enjoy more competitive pursuits gain even more benefit. Golf, for example, is a great way to maintain both mental and physical fitness because it combines the benefits of walking with sporting activity.

A study by the Karolinska Institute in Sweden revealed that golfers live an average of five years longer than non-golfers. In addition, a National Institutes of Health study found that golf improves focus and attention, with increased blood flow to the brain and stimulation of the cerebellum, enhancing coordination. Other benefits of moderate aerobic exercise – like playing golf – include increasing the amount of nightly restorative deep sleep.

Golf’s social aspects also provide psychological benefits, guarding against loneliness and increasing happiness. At the same time, playing golf can reduce stress thanks to its outdoor locations, which help reduce cortisol, the “stress hormone.” Being outdoors in the sunlight also promotes the body’s generation of Vitamin D, which is crucial for immune health, muscle function and brain cell activity. Fresh air increases the body’s consumption of oxygen as well.

On top of these benefits, playing a course with 18 holes is simply great exercise. According to Golf.com, walking the course, carrying a bag and swinging a club multiple times uses up a significant amount of energy — enough to burn nearly 1500 calories on average.

  • See “7 Reasons Why Golf Is Good for Brain and Body Health” to learn more.

Step 2:  Boost cognitive function with a scientifically proven treatment

A healthy body leads to a healthy mind, to paraphrase a common saying. Through specific treatments, you can further improve cognitive function in old age.

One very promising approach is Hyperbaric Oxygen Therapy (HBOT), available at Aviv Clinics in Central Florida. HBOT involves breathing 100% (pure) oxygen while in a special space called a hyperbaric chamber. The air pressure inside is raised to a level that is higher than normal air pressure, which helps the lungs collect more oxygen.

A study published in the peer-reviewed journal Aging showed that the use of HBOT had demonstrably positive effects on cellular health in aging humans. In the study, oxygen therapy was shown to “increase telomere length by more than 20%” and “decrease cellular senescence by as much as 37%.” These two improvements (both markers of cellular health) can have a big impact on cognitive function.

What’s more, Aging recently published another study showing that HBOT helps prevent Alzheimer’s disease. This landmark study is part of an ongoing program researching age-related cognitive decline conducted by the Sagol School of Neuroscience in Tel Aviv and Tel Aviv University. The research marks the first time that HBOT has proven effective in reversing the main activators and early symptoms of Alzheimer’s disease.

Relying on oxygen as a key component of brain function, Aviv has developed a unique HBOT protocol that sparks natural rejuvenation within the body. See more scientific research about the effectiveness of HBOT in improving cognitive performance related to aging, as well as recovery from brain injuries, strokes, erectile dysfunction and Lyme disease.

  • Understand more about the Aviv Clinic’s Medical Program.
     

Step 3:  Get personalized physical and cognitive coaching

Now, you can receive comprehensive professional support for your wellness goals. Even better, this help is available within a clinic-based program tailored to your individual needs.

Aviv has developed an approach that has shown considerable success in counteracting the effects of aging. The program combines HBOT with personalized cognitive and physical training, as well as nutritional coaching.

Aviv opened a 30,000-square-foot scientific medical center (take a virtual tour) in Central Florida at the beginning of 2021 – the first of its kind in North America. Through this center, the MedTech company has been able to deliver its scientifically evidenced medical program to a greater number of people.

The Aviv Medical Program is a unique regimen that begins with comprehensive, in-depth assessments of brain and body function. The results of these assessments are the basis for developing a strategically tailored, client-specific treatment plan targeted for personal improvement goals. 

The impact on the clinic’s clients has been substantial. Concerned about the health of his heart, Richard underwent HBOT at the Florida location, completing treatment in September 2020. “A subsequent scan of my heart showed a 23% reduction in plaque,” he says. “My doctors told me that couldn’t happen.”

Another client, Eileen, had a problem with short-term memory. She also found the program extremely beneficial, with much of her old confidence in her abilities returned. Her husband, Jack, says: “The changes I’ve noticed in my wife have been wonderful.”

  • Discover how it works: Aviv Clinic’s proprietary, 12-week treatment protocol.

While you’re improving your health at Aviv, you can also choose to receive additional, intensive training designed to advance your golf skills through the Golf Performance Program. The program provides intensive training focused on skill and performance, with access to more than 50 golf courses, 12 championship courses, and PGA/LPGA instructors. This training is combined with the standard 12-week medical program of HBOT, personalized cognitive and fitness training, and a nutritional plan.

Global professional golf athlete, Tommy Fleetwood, has recently begun his journey with Aviv Clinics. “It’s a fascinating concept,” Fleetwood says. “The synergies of brain performance and golf are endless, and Professor Shai* is one of the world’s leading doctors in how we can improve our brain function.

“Most athletes understand the positives of hyperbaric treatment,” he explains, “but that, along with cognitive brain training, is something I really think will be the future for an elite athlete.”

Better living in retirement

You can benefit even if you’re not a pro athlete. In fact, the Aviv Medical program combined with the Golf Performance Program promises to make retirement what it should be — a joy. Following the personalized course of treatment combined with world-class training activities can help you get the most out of all the years ahead.

  • Rethink aging and invest in your health. Contact Aviv Clinics to learn more today.
     

*Shai Efrati, MD, is an associate professor at Tel Aviv University and director of the Sagol Center for Hyperbaric Medicine and Research at Shamir Medical Center.
 

This content was provided by Aviv Clinics. Kiplinger is not affiliated with and does not endorse the company or products mentioned above.

Exes, Stepchildren and Your Will: A Cautionary Tale

More than half of marriages in the U.S. end in divorce, and for most, it is one of the most horrendous experiences of their lives. So, when the lawyer delivers the final divorce papers, the last thing on the mind of either former spouse is updating their estate plan. However, failure to do so could result in a real “mess.”

What Happens When an Estate Plan Fails to Be Updated

Bob and Mary got married in 1993.  Mary had one daughter, Jane, from a prior marriage. Even though Bob never officially adopted Jane, he treated Jane as if she were his daughter throughout the entire marriage. The joint trust referred to Jane as “the only living child of the settlors” and named her as the residuary beneficiary.  These terms have significant meaning under the law, and the failure to take that into consideration following a divorce can present a real problem.

  • SEE MORE These 2 Words Could Send Your Retirement Money to the Wrong Beneficiary

Bob and Mary divorced in April of 2019, and Bob passed away a couple of months later. As is often the case when a couple gets divorced, they did not update their estate planning documents to reflect their change in marital status. Did Bob still want Jane to inherit after the divorce? We’ll never know, but his estate plan speaks for itself. He may have only wanted Jane to benefit if he remained married to Mary.   

Following Bob’s death, Mary acknowledged she was no longer a beneficiary of the joint trust under California law (see discussion below) because of the divorce. Nevertheless, Jane filed a lawsuit, arguing that the divorce did not revoke Bob’s bequest to her. Stepchildren often don’t view divorcing spouses as an end to their relationship with the stepparent, especially emotionally, but the law is mixed on its views, as we’ll see below.

Legal Precedents for Exes and Bequests

In California, as with many states, once a divorce judgment is entered by the court, certain bequests and nominations relating to the surviving spouse are automatically revoked. For example, CA Probate Code §5040 provides that certain non-probate transfers (e.g., via revocable living trusts, individual retirement accounts (IRAs) and other retirement vehicles, such as pensions and 401(k)s, transfer on death and pay on death designations executed before or during the marriage) are automatically revoked upon the entry of a divorce judgment. 

Notably, life insurance policy and irrevocable trust beneficiary designations are not automatically revoked. 

  • SEE MORE Why Inheriting Money May Not Solve Your Problems

The CA Probate Code is silent about whether gifts to stepchildren are voided by a divorce when the document was executed prior to the divorce. But California case law offers guidance regarding how gifts to former stepchildren are treated:

  • In Estate of Hermon, the Court of Appeals stated that “when a testator provides for his spouse’s children, he normally intends to exclude children of an ex-spouse after dissolution, unless a contrary intention is indicated elsewhere in his will.” 
  • And in Estate of Jones, the Court of Appeals expanded the foregoing rule, stating that the court could look beyond the instrument for evidence of the deceased former stepparent’s ongoing relationship with the child following the divorce to determine if the deceased former stepparent would likely have wanted the gift to go to the child.

As previously stated, just because the wife and husband legally divorce, it may not mean the emotional attachment or the stepparent’s relationship with the stepchild will end. Thus, if the estate planning documents aren’t amended to clarify whether the stepchild or stepchildren no longer inherit, it should not come as a surprise if the stepchild “lawyers up” and tries to get a piece of the action. If the estate is large enough, there are no shortages of estate litigation attorneys only too happy to take on a case like this for a percentage of the recovery.

Lessons to Take Away

If you are going through a divorce, updating your estate plan is probably the last thing you want to focus on – but it is crucial that you do so. While non-probate transfers to former spouses may be automatically terminated by statute in certain circumstances, keep in mind that these may still be legally challenged by the ex-spouse or the stepchild or stepchildren.  Additionally, non-probate transfers to former spouses via an irrevocable trust, such as the typical dynasty trust and the irrevocable life insurance trust (ILIT), are not automatically revoked in the event of divorce, unless the trust document explicitly states so. 

If your current estate plan makes bequests to children or other family members of your soon to be ex-spouse, you must revisit these documents and amend them either to revoke the gift, or to specifically state your intention to provide for them after divorce. Otherwise, at death your assets may be distributed in ways that you did not intend.

Note that every state has laws like California’s, and laws are constantly changing.  Thus, no matter where you reside, we recommend that you consult with your estate planning attorney to effectively protect yourself and the disposition of your property in the event of divorce. 

  • SEE MORE Estate Planning Checklist: 5 Tasks to Do Now, While You’re Still Well

Laddering Fixed-Rate Annuities Offers Rates That Beat Bank CDs, Plus Flexibility

With today’s low interest rates, it takes planning to create sufficient retirement income without taking more risk than you need to.  The days when you could get good income from a collection of Treasury bonds are long gone.

You can get income from dividend-paying stocks, bank accounts, bonds and bond funds, and several different types of annuities.

Each has pros and cons. Stocks that pay high dividends can yield a good amount of income, but stocks can be volatile. You can lose money, and if you’re retired, you may not be able to wait until the market recovers. 

  • SEE MORE The 4 Phases of Retirement

Guaranteed deposits, such as bank CDs and fixed-rate annuities, may pay less, but both the interest income and principal are assured (although in different ways).

Most retirees use a portfolio of products and strategies. By mixing and matching appropriately, you can produce income, counteract inflation and provide some liquidity that you might need for anything from medical expenses to a great vacation or giving money to kids or grandchildren. 

The right mix is highly individual.  Retirees with pensions that cover the bulk of their monthly expenses may be able to take more risk with their money.  Others who don’t have that cushion and can’t afford to lose anything look to guaranteed strategies.

How Fixed-Rate Annuities Work

One type of guaranteed product is the fixed annuity.  A very popular option today is the multiyear guaranteed annuity, or MYGA. Underwritten by a life insurance company, it acts much like a bank certificate of deposit (CD). You deposit a lump sum, called a single premium. You then receive a set interest rate for a set period. 

Unlike bank deposits, fixed annuities are not FDIC-insured. However, there is a form of insurance provided by state guaranty associations in case the insurer becomes insolvent. Coverage varies by state. 

Annuity interest is tax-deferred until withdrawn. If you receive income from an annuity before age 59½, you’ll normally be hit with a 10% IRS penalty in addition to ordinary state and federal income tax.  

Fixed annuity features vary.  If you’ll be relying on an annuity for income, make sure that the product you’re considering allows either monthly or annual interest withdrawals, depending on your needs and preferences.

While these products often allow withdrawals of up to 10% annually, they do levy penalties for taking excessive withdrawals before the guarantee period is over. 

Laddering Fixed-Rate Annuities

A big advantage of fixed-rate annuities is that they usually pay higher rates than other fixed-rate instruments, such as CDs and investment-grade bonds.  As with CDs and bonds, you’ll get a higher interest rate if you’re willing to tie up your money for a longer period.

But is it worth it? On the one hand, “going long” will produce more current income. Some people are comfortable with that. 

On the other, going short gives you flexibility. If interest rates improve in the interim, you’ll be able to get a better rate once the guarantee period is over.

  • SEE MORE Enjoy Your 7-Day Weekends: A 3-Step Plan for Retirement

So, what makes the most sense?  For people with enough money to spread among different annuities, I suggest laddering guarantee terms. Because no one knows for sure which direction interest rates are headed in the future, laddering makes the most sense. It gives you both good current income and future flexibility.

What’s the best laddering strategy? It depends on what the interest rate curve looks like at the time you’re creating the annuity ladder.  If the curve is flattish, going mostly short would make sense.  If it’s steep, you might want to commit more to longer terms.

Today, I recommend laddering annuities from three to five years. Here’s why: 

First, there is a significant interest-rate bump when comparing two- and three-year terms. For example, currently (January 2022), you can earn 2.00% on a two-year annuity from an insurer rated A- for financial strength by A.M. Best.  

With a three-year MYGA, you can earn 2.50% from that same A- rated company. That’s 25% more interest.  Unless you’ll need all that money two years from now, it’s probably worth going for an additional year. 

Three years from now, you’ll be able to roll the proceeds tax-free, via a 1035 exchange, into any other annuity that looks most attractive then.  Maybe rates will be higher.

While a four-year annuity is an option too, five years is a sweet spot.  Even if you’re willing to tie up your money longer, you won’t get much more interest with a seven- or 10-year contract right now.

For instance, as of February 2022, if you’re willing to go with a B++ rated company, you can get 3.15% on a five-year contract with limited liquidity.  You’d get only a bit more, 3.20%, with the same insurer’s seven-year annuity.

If you prefer an A- or better rated company, you can earn 3.00% on a five-year annuity and 3.15% for seven years.

Fixed Annuities for IRAs

Besides being useful for nonqualified savings, fixed annuities also work well for IRAs.  And the same laddering approach works.

Between the ages of 59½ and 72, you may take taxable interest withdrawals from a traditional IRA annuity, or you can let the interest compound and defer taxes.  At 72, you must begin taking required minimum distributions (RMDs). 

If you’re already taking RMDs or soon will be, look for an annuity that lets you take out your RMDs without penalty. Many issuers have that feature. 

If you have all of your IRA in equities or even long-term bonds, you may be forced to make an untimely withdrawal when the stock or bond market is down. Whether you choose a three- or five-year or other term annuity, you’ll be assured that you’ll have the guaranteed withdrawals to pay your RMD.

Annuity expert Ken Nuss launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. A free quote comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com  or by calling (800) 239-0356.

  • SEE MORE Factoring Inflation Into Your Retirement Plan