In this podcast, Motley Fool senior analyst Bill Mann discusses:
- Intel cutting its dividend by 65%.
- CEO Pat Gelsinger's potential rationale for the cut.
- How else the company plans to invest the money.
Motley Fool host Alison Southwick and Motley Fool personal finance expert Robert Brokamp answer more of your questions about homebuying, pensions, and investing strategy.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Feb. 22, 2023.
Chris Hill: Whether you're a shareholder or not, we need to talk about Intel. Motley Fool Money starts now. I'm Chris Hill joining me today, Motley Fool Senior Analyst, Bill Mann. Good to see you.
Bill Mann: Ain't it great I'm perfectly on time?
Chris Hill: You are. As far as the listeners are concerned, you are 100% on time. Let's actually go back in time to late January when Intel reported fourth-quarter and full-year results that weren't great and shares of Intel fell about 10% that day. But one of the questions that CEO Pat Gelsinger got was about Intel's dividend. Let me quote you on what he said in response to the question. He said, "We are committed to the dividend and to a very healthy and competitive dividend. We're also making big long-term strategic investments, so we're putting all of that together and looking very carefully at the capital allocation priorities for the company overall even as we remain committed to rewarding our shareholders with the dividend." That was late January. Today, Intel announced it is cutting its dividend by 65%. My first question, which is an unfair one because I don't think you have an answer for this, my first question is, what is wrong with Pat Gelsinger? Why would he make that kind of declaration not a year ago, not even six months ago, just a few weeks ago? I'm baffled by this.
Bill Mann: Do you remember in the movie Shanghai Noon when Jackie Chan's character said, I didn't give you bad directions, I gave you wrong directions? That's what this is. You don't remember that, do you?
Chris Hill: I remember the movie. I don't remember that line.
Bill Mann: It was Owen Wilson, actually.
Chris Hill: It would make me think more of Pat Gelsinger if in the statement today he quoted the movie Shanghai Noon. Give me your explanation/defense for what Intel has just done.
Bill Mann: I'll give you a real answer here. It was obvious in January and they came out and said that they were in the midst of a big cost-cutting and their dividend is several billion dollars. When they were asked about it, he didn't say we're committed to keeping the dividend where it is, he said, we're committed to keeping the dividend. We're committed to the dividend. But I think people took that because he did not add anything else, was we're committed to keeping the dividend where it is, which here we are doing the math. What are we seven weeks later?
Chris Hill: No, we're less than a month later.
Bill Mann: Less than later.
Chris Hill: January 27.
Bill Mann: Come on, man. I'm trying to give them a little bit of credit. No. Maybe I shouldn't.
Chris Hill: I mean, I'll give you and Pat Gelsinger partial credit because you're right. He didn't say we're going to keep the dividend right where it is. I guess the follow-up question to that is, do you think a dividend that is 65% lower is, to use Gelsinger's words, a very healthy and competitive dividend. Because the dividend was increasingly, I think part of the case for shareholders. It wasn't the business performance of Intel, which has just been having its lunch taken from it every day by AMD.
Bill Mann: Absolutely true. AMD and their orchestra have been beating up on Intel really now for, I guess what you could call the better part of a decade. Yes. I mean, I think that it was a form of verbal jujitsu for him to put it that way. I don't actually give him credit for this, but I do think that he answered the question, he just didn't answer it thoroughly. To be fair, for a company like Intel that has seen its earnings drop, its market position drop, its overall financial health drop, as a percentage of those things, it still may be a competitive dividend, it's just not a competitive dividend in the way that the average dividend investor would think about it. I'm not excusing him at all. In fact, I'm condemning him in the exact opposite way because I believe that what he said was one of those technically true things that he and his team knew full well was unlikely to hold up even weeks later.
Chris Hill: Intel paid outs six billion dollars in dividends last year. Let's say that this year that'll be two billion. Does this increase the pressure on the investments that they are making then if part of what they've done here is like look, this is a tough move. This is a necessary move because we've got investments we want to make and to pull it away from Intel for a second. I mean, this is a fair and reasonable question. Anytime a company makes any capital allocation, is this the best use of the money? When a company decides to increase their dividend, do a share buyback, is this really the best use? I guess a more generous way to look at this is to say, Gelsinger and his team found a better use for four billion dollars. I mean, is that what this is now?
Bill Mann: Yeah, maybe I think it's important to look back over the last couple of years and the investment in Intel. They've paid a dividend for the better part of two decades, but it's been very small. But the magic of Intel has always been its manufacturing. They were innovative, they were ahead of the game. Then they got passed by Taiwan Semiconductor, as you mentioned, they've been passed by AMD, and so They have a six billion dollar dividend payout over the last year and they need to at some point double down on getting back to where they were before. I think you're exactly right.
There is a whole lot of pressure that comes from them deciding to retain this capital and to make sure that they don't fall further behind. Because Intel, it has become an also-ran. You remember in the 1990s and in the 2000s, everything was Intel Inside. We know what that tone sounds like. Their marketing was fantastic, but it was fantastic because their manufacturing and their innovation were even better. For Intel, I mean, you've got to look at Pat Gelsinger coming out today knowing full well that he was going to get crucified for this,. Had to know it. But for Intel, I don't think they have a whole lot of choice because you can keep a dividend wherever you want and if you descend into irrelevance, you're still not generating a market-beating return for your investors.
Chris Hill: It's a great point. We will wrap up there. Bill Mann, really appreciate it. Thanks for being here.
Bill Mann: Thanks, Chris.
Chris Hill: You had more questions, so they've gotten more answers. Alison Southwick and Robert Brokamp dig into the Mailbag and answer your questions about home-buying, pensions and investment strategy.
Alison Southwick: Next question comes from Dan. Should I consider my projected pension income like a fixed-income asset in my portfolio?
Robert Brokamp: I would say yes and no. On the yes side, a pension fulfills some of the same roles as bonds would in a retiree's portfolio. They provide a stream of income and ideally they'll hold up when the economy and or the stock market goes down. I say ideally because last year, both stocks upon stunk. Theoretically, retiree with a pension could take more risk of their portfolio. On the other hand, one of the roles of fixed income in a portfolio is to dampened down the volatility for investors who can't stomach the ups and downs of having all their money in stocks and a pension can't do that for you. So you still have to come up with an asset allocation that you're comfortable with.
By the way, these same principles apply to social security. In fact, the late John Bogle, the founder of Vanguard, was a proponent of factoring social security into your portfolio as a big holding in bonds. What amount of bonds is your pension or social security worth? For that, you have to calculate a present value. Fortunately, Professor Benjamin Bally at the University of Massachusetts UMass created a website just for that purpose and it's called valueyourpension.com. Using that calculator, I figured out that the present value of a pension for a 65-year-old who will receive $2,000 a month that does not adjust for inflation is around $300,000. So that pension is like having a $300,000 bond portfolio on the side. My final point on this is that you should factor in the soundness of your pension. Some are significantly underfunded and may not be able to pay all the promise benefits. So the less confidence you have in your pension, the less you should factor it into your asset allocation annual retirement plan.
Alison Southwick: Next question comes from Aaron. I'm a 27-year-old teacher and have access to a 403(b) Roth through school, and also have a Roth IRA. Through both of my Roths, I invest 18% of my salary. I usually have anywhere 100-$300 left and my budget in want to invest a little more. Last year, I put that extra money in my brokerage to buy dividend stocks, with the brokerage being taxed each year, would I be better off putting that extra money in my Roth so it can grow tax-free for the next 30 years until i retire or should I keep growing my dividends in my brokerage even though I will be taxed.
Robert Brokamp: Well, Aaron, first of all, as a former 27-year-old teacher myself, I want to say kudos to you for saving so much. Most Americans are nowhere near your savings rate and you're able to do it on a teacher salary. So great job. Now when you hold dividend-paying stocks in a taxable brokerage account, you do pay taxes on the dividends, even if they're reinvested. If you're investing in those stocks for retirement, it generally makes sense to keep them in an IRA. That said, you may be investing for something other than retirement and you don't want to lock the money up in an IRA. In that case, keep the stocks in the brokerage account and just bite the bullet. If you're ever looking at two investments for that account and you think they both have equal potential, one pays a dividend and one doesn't, you might go with the latter, but don't avoid a promising investment because you'll have to pay taxes on dividends because some of the greatest investments ever have been dividend pairs.
Alison Southwick: Next question comes from Murray. I have been trying to teach my young almost team kids the power of compounding and want to show them a fairly accurate growth chart using the S&P 500 Index. Should I use annual average growth from history over the last 40 years, last 20 years, or maybe 15% for two consecutive years followed by a negative 5% year and repeat or something else? I'm thinking that the last 20 years have produced totally new and different industries than the previous 20 years. I expect the same to be true in the future, which may lead to more growth.
Robert Brokamp: Now the interesting thing about the stock market and investing in an index fund based on something like the S&P 500. Is it there have always been and always will be new and different industries and companies. The way indexing works, you're always eventually getting rid of the old, getting more of the new and historically earning 8% to 10% a year over the long run. If you want to illustrate this to someone, I think returns since 1970 is a good time capsule. I'd include US stocks, international stocks, and real estate.
The last 53 years or so have seen just about everything. Bull markets, bear markets, high-inflation, low inflation, high-interest rates, low rates, times when US stocks outperformed international stocks and vice versa. Wars, terrorist attacks, and all world-changing innovations. We've seen it all over the last 50 or something years, plus a five-decade time span is a good way to demonstrate to an almost teenager how much the world can change over the course of their career. Do an online search. You should be able to find some charts or calculators that will do a lot of the work for you. I think it'll be a great illustration of how investing over the long run can pay off regardless of what happens.
Alison Southwick: Our next question comes from Clayton. I graduated with a masters degree in accounting last year and I'm currently an auditor for a big-four company. As someone who just entered the workplace, has been a struggle to get myself adjusted to saving and budgeting with expenses like rent, healthcare, and insurance, it has been hard to understand if I'm saving efficiently. While I'm young, my risk tolerance is very high. So when it comes to investing, I would like to take a lot more risks. However, traditional investing rules say that putting money in large mutual funds or ETFs, is the way to go and is the best way to have long-term growth for personal savings and retirement. My question to you is, what would be your broad investing strategy if you are 22 years old in today's market?
Robert Brokamp: Let's start with the budgeting parts. Since you're just starting out, you may not yet be familiar with many of the tools available to help you track and plan you're spending. So checkout services like Mint, Personal Capital, Tiller and YNAB and YNAB stands for you need a budget. But since you're an accountant, you're likely pretty comfortable with a spreadsheet and you can find plenty of free budgeting spreadsheet templates on the Internet. Now for investing, since you're young and your risk tolerance is high, you could put all your money in the stock market as long as you don't need it for at least five years. That's what I did when I started investing at around your age. How you do it is up to you. You could invest in individual stocks or in stock mutual funds or both. That's what I think what most fools do. Chances are you're only choices and your 401(k) plan our funds anyhow.
So you could choose maybe a mix of US large-caps, US small caps and some international stocks. Your 401(k) likely also as target date funds, which does all the asset allocation and rebalancing for you. At your age, you'd be looking at like a 2065 fund, which is around the year you'd be of retirement age. It'll likely be very aggressively invested and we'll get more conservative gradually as you get older. For some people they get maybe too conservative too soon. But I think a target they fund is a good starting point for some of your money. If you're new to investing, then as we learn more about investing, you could begin buying individual stocks in a brokerage account or IRA. As you invest more in individual stocks, you may learn to love it and that you're good at it and you put most of your money in individual stocks, but you don't have to do that. You can still do very well, just sticking with mutual funds.
Alison Southwick: Our last question comes from Frank. My wife and I are saving for a 20% downpayment on our first home that we hope to purchase it about two years. We're on pace, but I want to ensure we are saving the most effective way. What allocation would you recommend? We have most of it in a standard savings account with about 10% of it in stocks, is that too high or low of a percentage if we plan to spend it in two years from now.
Robert Brokamp: While the standard advice here at the Fool is that any money you need in the next few years should not be in stock. I'll just reemphasize that advice. But some people still want to take a little extra risks since the odds are historically in their favor. The overall stock market has posted a positive return in three out of four years. After a down year like last year, the historical odds are actually slightly better with an 80% success rate. It's up to you and I think your 10% allocation is the most I would do.
But what you also should do is make sure you're getting the best race on your cash. These days, you can get nearly or over 4% from high-yield savings accounts and CDs. You generally have to go online to find these rates. The Motley Fool owns a site called The Ascent that can help you find some of these higher-yielding options. You can also turn to Uncle Sam. The annualized rates on six months and one-year treasury bills are now over 5% for the first time since 2007. Not only are short-term treasuries offering attractive yields, the income is also free of state taxes. That makes them even more attractive to the investors in the 42 states that levy income taxes.
Alison Southwick: That's it. That's all she wrote.
Robert Brokamp: That's all she wrote.
Chris Hill: As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
