Weathering Market Volatility: Can Dividends Help?

LIZ ANN SONDERS: I'm Liz Ann Sonders.

KATHY JONES: And I'm Kathy Jones.

LIZ ANN: And this is On Investing, an original podcast from Charles Schwab. Every week, we analyze what's happening in the markets and discuss how it might affect your investments.

Well, hi again, Kathy. Safe to say that a lot has happened in the markets since we last did a podcast episode. I think a lot could potentially happen in markets as we tape this particular episode. I think the horizon, the time horizon for news these days can be measured in seconds. Not a lot of evergreen content out there, but here we are again, again talking about volatility in your world and the fixed-income side of things, in my world and the equity side of things, and the interrelationship between those two. Tariffs, obviously. So let me check in with you and see if you had any updates for us either in the Treasury market or maybe your latest thoughts on the U.S. dollar, given this very unique period we have been in with weaker bonds, weaker dollar, volatility/weakness in stocks.

KATHY: Yeah, I think we can sum it up with a loss of confidence among investors. And I think that that's a reflection of just the uncertainty, that word again, "uncertainty," but the rapidly changing policies that we hear. So if you're an investor, you want to have some investment thesis, and then you want to have a strategy and maybe some tactical moves around that, right?

And if the underlying policies change on a daily basis, you can't really form an investment thesis that's going to last any length of time so you can make longer-term investments or even shorter-term trades. You know, one day this is on and the next day it's off, and it's just been a market that's been roiled. And I think, though, that where I see the loss of confidence is when we had the move down in the dollar at the same time we saw Treasury yields move up. That's not the way it normally works. Normally you get, if there's some sort of event in the market, the Treasuries rally and the dollar rallies. And this time we saw some evidence that whoever was exiting the Treasury market, I assume, was probably offshore because we saw the dollar move down at the same time. Now things have settled down.

And I'm not calling it a crisis of confidence. I'm just calling it a loss of confidence right now. Market's really searching for some sort of path forward to know what to do. And we still don't really have that path laid out. So, and it's not just tariffs, which obviously are front-and-center right now, as you know, but it's the budget. Now we're moving into budget season, and it looks like we're going to adopt a budget that will expand the deficit again.

We have the DOGE cuts ongoing and the ripple effect of that throughout the markets and then the counter-to-our tariffs strategies that we're seeing from around the world, and you put that all together, and The Treasury market now has steadied itself and it seems to be finding its footing right around 4.35%, 4.40%, and that's actually about where yields have been for the past month or two, but they've been up and down and all around. And we've seen some widening in spreads on the investment grade and the high-yield corporate side. So there's a lot of dislocation that's just trying to find a place to settle down. And I'm afraid that without some sort of consistent messaging or consistent path forward, this is where we're going to be probably for a while yet until we find out how some of this plays out. So, you know, here we are just trading range, volatility, and trying to figure out what's going on. How about you, Liz Ann? It sounds like not unlike what you're seeing in the stock market.

LIZ ANN: Yeah, absolutely. It was interesting in that period of really heightened volatility that you talked about in the Treasury market where initially you saw a big drop in yields based on growth outlook concerns driven by the trade war and then the reversal of that, a big spike up in yields. And for, well certainly when yields were coming down, it was not to the benefit of stocks because those lower yields reflected a weakening growth outlook.

And then at least at the beginning of the yield move up, it was not beneficial to stocks. I think the way that stocks seem to be keying off Treasuries is some stability is probably the recipe for some stability and lower volatility in the equity market versus a direction significantly one way or another. And I think that's what we saw. You know, today, as you and I are taping this on Wednesday, it's a weekday for the market, and some of the news that is swirling around today I think is important in a bigger picture context. You had a pretty eye-popping announcement from Nvidia as they faced now the ban on selling a particular version of their chip to China. The ban coming from the Trump administration, but what's interesting is they actually created those chips specifically to be in compliance with what came out of the 2018 tariffs and what we now could think of as a mini trade war compared to what we're experiencing right now, and they announced that it probably means a near-term loss of $5.5 billion. So this is not a small number.

And the other thing that's happened in the last couple of days is you're just hearing more and more from companies that are either withdrawing guidance altogether, or one of the airlines, actually two of the airlines, have talked about their outlook. I think it was United today came up with two scenarios, kind of a base case pre-trade-war scenario where they said we had a pretty decent shot of probably making our numbers, meaning reporting ultimately for calendar year 2025 earnings in line with where the consensus was, and then they came up with a worst-case scenario, which would be a recession.

KATHY: Liz Ann, have you ever seen this before? Companies reporting two versions of …

LIZ ANN: No, no, we've seen the withdrawal of guidance before. It reminds me of what happened in the early part of the pandemic when for obvious reasons at that time, to try to provide guidance one, two, three quarters out at the cents-per-share level to companies when the entire global economy was locked down just made no sense. Obviously the why this time in terms of the uncertainty is very different than a pandemic erupting.

But we've already gone 17 consecutive weeks of declining estimates for calendar year 2025. And even absent precision guidance from companies to analysts, I think it's a pretty safe bet that the direction of travel for estimates is further down from here. And to put some numbers on that, we'll start to get daily updates on how earnings are progressing and what companies are saying about their outlooks this week because we're now getting into the throes of earnings season. 

But for now, the data we only have through the end of last week in terms of the consensus. But at the end of last week, the consensus for S&P 500® earnings growth year over year in calendar year 2025 is down to 9% and change, and that was 14% and change at the beginning of this year. So already a pretty significant haircut, and again, I think when left to their own devices without the benefit of guidance from companies, I think analysts are going to lower estimates reflecting all of this uncertainty. You know another interesting thing that the airlines talked about is foreign travel having been curtailed significantly. 

There was a lot of headlines around that out of Canada, but it's happening elsewhere as well. And there's also in some cases, sort of consumers rising up in other countries with their own version of backlash against this, and that affects, for the United States, many of the products that we export. I find it also interesting, frustrating, myopic, whatever term you want to use, that when we discuss tariffs and the impact, so much of the focus is on U.S. importers and rightly so because they're the actual ones paying the tariff, but we are an export economy, too. We import more than we export, but we're one of the biggest exporters. We've just moved up the value chain in terms of what we export, and we're also an exporter of services. In fact, many of the countries, inclusive of China, with which we have a trade deficit, it's only on the goods side of things. We have trade surpluses on the services side of things. 

So this whole reordering is unbelievably complex, and we've talked about it in past episodes, just the complexity of the ecosystem of global trade is … it's, you know, you're kind of trying to turn an ocean liner at the speed of a speedboat, and it just doesn't work that way. So I think what we're going to hear from companies and what analysts, I think, will try to get from companies during earnings season, absent any precision guidance, is just "How are you navigating this, at least in the near term? What is the potential pressure on profit margins?" which is another way of asking, "Are you able to or plan to pass on higher costs to consumers?" 

So I think that will give us a little bit more color. And then you have a retail sales report like we got today, which was interesting because it was fairly strong, in line with expectations but up 1.4%, which is one of the strongest months recently for retail sales, and the big jump within from a category perspective was motor vehicles and parts. And I don't think it's a stretch to say I guarantee that a heck of a lot of that, if not all of that, was front-running of tariffs. 

I also have a personal experience tied to the second biggest category in terms of where sales jump, which is building materials, because we're getting toward the final stages of building a house. And our builder started talking to us a few weeks ago about rushing some orders of things to get ahead of tariffs. So that may be an example of why we're seeing moves up in an area like building materials as well, but certainly a lot of a front running of the tariffs. And if we're accurate on that and we don't see something to cause a lift in confidence, my guess is this is the calm maybe before a little bit more of a storm in terms of things like consumer spending.

KATHY: Yeah, and I look at all this, and I say to myself, if I were at the Federal Reserve, "What would I do?" And clearly, they've come to the conclusion that the best thing they can do is nothing at the moment and wait and see how it all works out. They, obviously, folks at the Fed have to be coming up with various scenarios for how this plays out, doing the analysis, trying to figure out what the appropriate policy is going to be. And meanwhile, we have the Treasury secretary talking about interviewing people for the chair of the Federal Reserve for when Powell's term is up. 

LIZ ANN: And his term is up, what, about a year from now?

KATHY: Early next year, early 2026, end of January, I think it is. 

LIZ ANN: So less than a year.

KATHY: Yeah, so, talking about having a lot of balls in the air right now, trying to figure out what the appropriate policy is for an environment that's changing really rapidly and in different directions. An administration that really wants to, as you said, reorder the entire economy, not just trade. I mean, we're talking about trying to reorder the whole way the U.S. economy works and interacts with the rest of the world and a potential supply-side shock because of tariffs. And you sit there and you say, "Well, what in the world is going on that they can actually hang their hats on?" and say, "This is my anchor for setting policy." They also have to be concerned about the foreign selling of Treasuries. Now, I think it was my opinion, without any data to back it up yet, is that it was probably mostly private-sector, and it wasn't central banks dumping Treasuries, I think.

LIZ ANN: But private sector foreigners to some degree, right, yeah.

KATHY: Yeah, absolutely. Yeah, but I don't think the narrative that it was central banks dumping dollars or China specifically, I don't think that that's probably accurate. We don't get that data for a while. But I think that's probably, look, that's something that China negotiations can hang over our heads. But I don't think that that is kind of the step that the Chinese government would take at this stage of the game. It has a lot of downside for them and the global economy, and I don't think that's the option that they want to go to unless it's an absolute last resort. But now it's kind of hanging over the market right now. It's one of those things, and the Fed has to actually have a plan for this, the Fed and the Treasury now have to think about, "Well, what do I do?" And I assume what would happen is the Fed would have to expand its balance sheet and buy bonds to hold down interest rates.

But you know, to have to be going through this exercise without any exogenous shock, more of an internal change in our direction, has to make it really tough on the Fed because there's still many moving parts that it's not surprising to me that they're just sitting still and saying, "Well, you know, we're watching inflation," which is … which is the understatement of the century right now. 

Tough time to, I say, have an investment thesis, a strategy, or even a tactical approach to this market. It just changes too fast.

LIZ ANN: Yeah, and you know the implications of what foreigners are doing, and you're right to point out that it's unlikely that China is doing some form of, you know, dumping Treasuries en masse because it would hurt them more. They wouldn't want to put downward pressure on the value of those assets, but correct me if I'm wrong, the diversification away from the dollar having been so dominant has been ongoing for about a dozen years, so that trend is probably going to continue, but any significant step up in pace would hurt them. 

But it's also the case that foreigners own a lot of the U.S. equity markets. So at the beginning of the so-called great moderation era when we really saw rampant globalization, from the kind of mid-1990s up until the early part of the pandemic, foreigners went from owning about 5%, actually less than 5%, of the total U.S. equity market now to close to 20%. 

And like you mentioned on the fixed-income side of things, unfortunately, the data is fairly lagged. I think within the next few days, I believe we'll get an update, but that'll bring us only through February. The latest hard data we have is only through January. But even in January, you saw a big decline in net purchases of U.S. equities by foreigners. So I think, you know, we both have been in this business long enough that we remember different cycles of when certain economic reports take on more importance than others, and then ones that we were obsessing over then suddenly become the boring reports that nobody's paying attention to, and I'm guessing this flow data in terms of what foreign holders are doing with, across the spectrum of the Treasury market, even maybe the corporate bond market and the equity market, is probably going to garner a bit more attention, but I agree. The Fed has put itself in a timeout. It's probably the right thing to do. And I think it's in keeping with a lot of companies that are putting themselves in a timeout, which just holding off on any kind of long-term investment plan, CapEx plan, and that seems to be the right stance at this point.

KATHY: Yeah, it's different times, different times than we've had. 

So you know, with that said, we can't really come to much in the way of conclusion, I think, today on this. But we do have a guest who I think is, you know, really going to be helpful in terms of helping clients and just everyday investors think about their portfolio. So why don't you tell us about him today?

LIZ ANN: Yeah, and he's so good at talking about what really matters for investors. So we have on our colleague Deane Antoniou. He is a director and portfolio strategist for ThomasPartners. He's also a Chartered Market Technician®, a CMT, as we often say for short. He has spent about 25 years working with and serving investors approaching or already in retirement.

He has held a variety of roles across Schwab supporting our wealth and asset management solutions. He actually led the acquisition and growth for Schwab Asset Management, managed investing, and third-party offers in our branch network. And when he was a regional director and portfolio strategist for Charles Schwab Investment Advisory, he made a big impact as well. Back in 2002, he helped launch what is now what we call Schwab Wealth Advisory.

So Deane, I'm so happy that you're on our pod with us. You and I have known each other, must be 25 years

DEANE ANTONIOU: About that, yeah. 

LIZ ANN: About that. We're both at the company about the same amount of time. And I think I met you pretty early on and have done a number of events with you, and it's always been a blast. And one thing I love about the way you think about markets and the messages you impart to investors is you're a storyteller. And I think sometimes that's the best way to frame a lot of this craziness that we deal with is via story. So I'm going to ask you to share some of those. But particularly in your current role, you are working a lot with and messaging to investors that are either approaching retirement or in retirement.

One of the things I liked about what I've heard you say is "What got them here is not always what will get them where they need to go next." So what are you speaking to with a comment like that?

DEANE: Well first it's terrific to be with you again, Liz Ann. I've always enjoyed our time together. It's just always so much fun because we get to, you know, really just take all this other information and bring it down to what you know what matters to clients, which is really all that matters at the end of the day. When we talk about that idea of "What got you here isn't what's going to get you there," you know when you're investing for retirement you have a job, you have a paycheck, have all of these other things that are going on. And so when we hit periods like we've hit recently when the market's volatile, it's bouncing around, it's much more easy to navigate when that paycheck is taken care of. So you can, by and large, ignore your investments and just contribute and move along and probably weather all manner of storms. 

Once you get to retirement, it's interesting how things change, and I've spent the bulk of my career working with folks who are either just approaching or in that retirement phase, and it's very challenging: You're leaving your job, you're moving into different things, and now you're relying on your portfolio in different ways. And so we've heard retirees tell us is "I woke up one day, and all of a sudden news was all bad."

You know, that idea that once the paycheck stops coming in, now you're looking to your portfolio to do that. And there's this urgency around, I want to solve for that. And the market bouncing around and all these other things, you're doing what's natural, or you want to protect or you want to make sure you've got your income synced up. And it's just not the same interaction with your money that it was once before.

You sort of no longer have this kind of cushion of a paycheck. And more importantly, you need your portfolio to behave differently for you, which is really key. And so that's really, really what we focus on when we think about that. And it's a daunting time for people. And if they've done their work, it shouldn't be.

LIZ ANN: Well, speaking of doing their work, you and I generally sing from the same hymnal with regard to the necessity of having a plan and maybe some of what should drive what that plan looks like and what the investment strategy is associated with that. And you and I have had lots of sidebar conversations about sometimes the peril of establishing a plan solely based on time horizon, as opposed to truly understanding your desire for income or capital preservation, and it sometimes can trip investors up. I often talk of it in the context of our financial risk tolerance, which should sit behind the plan, and then our emotional risk tolerance.

One of the things you wrote in your recent quarterly observations, which hopefully we can put a link in the show notes to that, is quite relevant for the times in which we live now, is "Over long stretches of time, price volatility fades, but during periods of sharp market drops, the uncertainty is often harrowing." So we've both been doing this for a long time. I'm in my 40th year doing this, so we've ridden a lot of ups and downs in the market and cycles. Maybe in the context of this period of uncertainty, what are the most important messages to, especially people that are approaching retirement or in retirement, of how to emotionally handle periods of massive uncertainty like we're in right now?

DEANE: So you hit on the first thing, and the first thing that can help with a lot is really just having, putting some energy into a plan because where you are today may not be where you were five years ago or 10 years ago. And making sure you have a well-structured, thoughtful plan. Have you taken an assessment to see what your, you talk about the emotional risk or what can my stomach take? And that's important, but once you get past the having some clarity on what your wealth that you've built is able to do, then that clears some room. So if you know that you've saved enough, and you have some numbers to it, your portfolio can sustain the following things. Now we have some data that can give you some assurance. Now the second part is, with that assurance, have I built a plan that I can wake up every day and be OK with? Because what we'll hear from investors is, you know, "I've got these numbers, and they sort of make sense, and they sounded good when I was sitting in the office and we went through percentages and probabilities, but now I'm seeing this stuff go on, and it's really making me question it." And you know, pick your headline, and there's no shortages of headlines to make you question it. 

But pick your headline, and it's going to make you say, "Well, maybe I should do something different." And the minute you start stepping into that, it tells us one of two things. Either the portfolio, the way you have it constructed, isn't really built for your stomach, or the portfolio, you're not comfortable enough around it. And what that does is it leads folks to potential mistakes or missteps, which is "I'm feeling anxious, and I want to go do something about it." And oftentimes doing something about it can be exactly the wrong action. And so that's really what it is. 

So step one is have a plan, put some math to it. The tools that we have today, the resources that advisors have to sort of construct that plan. And that plan should include, you know, "What's my comfort level? What kind of income can I generate from this?" You know, oftentimes it's having some buffer of income. If that income's coming in, regardless of what the market's doing, it gives you a nice cushion for saying, you know, "OK, I don't have volatility there." You know, having something that aligns with you, really, really critical.

And so that's really what I guess the steps would be, the primary steps. Have a plan and then really look at your options to make sure they're going to fit. And it's OK to ask questions when you're in periods of volatility. I wouldn't say put your head in the sand. If you're feeling something that's making you really uncomfortable, well then, you know, ask that question because we should be able to find a place that gets you into comfort.

LIZ ANN: Yeah, you wrote also in the quarterly piece, when you are caught in the riptide, the best course is not to fight it, but our instincts are often the opposite. So clearly there are times even with a plan and what has ostensibly been disciplined around that plan, you get to really tumultuous market periods that you find maybe that there's a wider gap between your financial risk tolerance and your emotional risk tolerance than you might have thought when putting the plan together. So I know I'm sure that's where disciplines like rebalancing comes in. It sort of forces the right kind of behavior, where it forces us to add low and trim high. You and I have talked about this before. So it's hard when you're trying to give advice around how emotional things can get, but it's our money, and we're emotional about our money. But what are maybe some of the tried-and-true messages that you impart when you are talking to investors, in that near retirement or in retirement?

DEANE: So a couple of things.

LIZ ANN: Aside from just turn off the news, don't go on social media.

DEANE: Well, it's, you know, those are good experiences anyway. You can spend some time away from this stuff, and it's absolutely amazing. You know, my wife and I turned off everything last weekend. We had a weekend, was just the two of us. We were celebrating her birthday. It was fantastic. And then I turned on the news and I'm like, "What did I miss?" And I'm like, my life was just fine for three days without seeing that.

LIZ ANN: Well, you could have shut things off for three hours and missed a lot these days.

DEANE: And that's the key. But when you're in it, and you see these things, so really what it comes down to is building things into your approach that can find you calm. One, having a portfolio or a strategy that you understand, that makes sense, that sort of fits with you. If you're trying to purely time markets, in order to provide your outcomes. One, statistically, it's really not there for you. But more importantly, we're not good at it. So when we think about it, you use that phrase, trim high and add lower. 

LIZ ANN: Yeah, add low, trim high, yep.

DEANE: Yeah, and I love that because we always have this "buy low, sell high" mentality. And what you're talking about is having some systematic discipline in the portfolio. I will never forget when you and I were in the Bay Area last year, a conversation I had with a client who was, I was in the office with the advisor …

LIZ ANN: I think I know the story you're going to tell with regard to a very popular stock. Yes, love this story.

DEANE: Yes. He was a retired guy in the Silicon Valley area. He's from the semiconductor industry. He had a lot of different semiconductor stocks, and he had a big position in Nvidia. And he had, you know, trimmed a piece of his Nvidia, and we're walking back to the office, and he says to me, "You know, I'm very upset because I sold some of my Nvidia, and it went up." And we got back to the office, and we started pulling up, you know, and we're looking at his portfolio and his plan and everything that he has going on. And he had sold such a tiny fraction of his Nvidia, you know by percentage, and it was just a systematic sell, which is what you're supposed to do, just periodic, because you don't know what tomorrow brings. So having some systematic, you know, "trim high and hopefully goes higher," right? Trim the hedge, and the hedge keeps growing, which is exactly what happened. 

I started laughing because, you know, I had … I've shared … I said that he said, "Are you laughing at me?" I said "No, I'm laughing at me." He says "Why are you laughing? I said "Because I sold a stock that I'd done incredibly well with. I sold 5% of it and it went down 20% the next day." And he smiled at me, he said, "Oh, that's good, you got it right." And I started laughing, I said, "No, we both got it wrong." He said, "What do you mean?" I said, "You're upset because what you own has grown and gotten bigger. I'm happy because what I sold, but I still own the majority of, has gone down." I mean, so we're just not wired really well to make these sort of decisions. We get swept up in that. So if we have securities that we've done well with, terrific, that's our goal. We want to own securities so they grow over time, but you have to, especially as you're getting into these retirement years, but I think this is systematic throughout. Because you don't know what's going to happen, and the odds certainly tell you that if you're trimming, taking gains systematically over time, you take the emotion out of it, and you're able to … you're able to, you know, reallocate your money and it really … it just simply works. It's one of the things that works so incredibly well in portfolios over time.

LIZ ANN: Yeah, and you know, the whole process of paring back big gains, particularly if you, one of the things you're trying to avoid is developing a concentration-risk problem, which clearly became something that all investors needed to be mindful of in a year like last year, where you had all the enthusiasm around the Magnificent Seven group of stocks. And our message was just "Be mindful of the risk associated with that much concentration."

But there is that emotional side of it. I often share that Nvidia story, but I put it a little bit different … or my conclusion would be, if I were having that conversation is, "So you'd be happier if the 95% of the stock you still own had gone down?"

DEANE: Well, apparently I was, right? 

LIZ ANN: Right, that was your side of that. And it's sometimes, those stories sometimes are aha moments. And we know the basics of that. That makes a lot of sense. But I think when we're in the throes of it, we have that emotional attachment, and that is driving our investment decision-making, that is where we sometimes run into trouble. Another story that I know you like to tell that I've always thought was wonderful, and in your piece, your quarterly piece, the title of this section is "Apple's and Berkshire's Missing Thirds." So I won't promo it any more than that. Go. Tell us your Apple and Berkshire story.

DEANE: So what's interesting, if you really boil it down, investment strategies fail really with one of two things. Either you take too much risk, or you take too little risk. That's really the extreme here. So if your portfolio has too much risk, it's going to put you in a place. If it has too little risk, it's going to put you in a place. And I love having this conversation in a room full of people because the simple thought is most people have heard of Warren Buffett and Charlie Munger, you know, for 45 years as a team leading Berkshire Hathaway, and the other pair of Steve jobs and Steve Wozniak who founded Apple Computer. And we know the success story of those pairings, but what people don't know is there's … there were two other guys: There's a guy by the name of Rick Guerin, who was part of the Berkshire Hathaway group. He was a good friend of Charlie Munger's. He was involved very early on in several of the deals. In fact, you know, Sees Candy was part of his acquisition. But in the '73-'74 bear market, he was so leveraged on margin that he had to sell his shares. And he sold his Berkshire shares to Warren Buffett for $40 a share. And so, you know, we know what that's worth today, and it's easy looking backwards to kind of say the same thing. And he had taken too much risk, and that's where it placed him. 

On the flip side, Steve Jobs and Steve Wozniak, and I have to thank your friend Barry Ritholtz for this story because it was in his book, and you had him on recently. It was a terrific conversation. In that book he talks about the story of Steve Jobs and Steve Wozniak had a third partner by the name of Ronald Wayne. Ronald Wayne was older. He was 40 years old when he had these two younger guys, and they created a partnership, and he was worried about what that partner, you know, the liability from that reflecting back on his family and what it might mean if the business failed. So he ended up selling his shares back to the two Steves for $800. We know what the outcome of that has been. Imagine it was 10% of Apple was his stake, and he gave that back for $800.

And so, you know, these are fairly extreme examples, but they really highlight the idea, you know, that in investing, you know, taking too much risk can cause you to step away from, you know, so much future return. And so that's a structural thing. "I've positioned my portfolio where I can't handle that and really stay through for the long term." In fact, Warren Buffett talks about Rick Guerin, and he said, "Rick was every bit as smart as us. He was just in a hurry."

And so that highlights one half of it. The other side of it is, you know, too risk averse. You know you're not willing to take that risk, and you miss out. And so when I think about the world today, you know, and the numbers may have shifted here slightly in the last couple of weeks, but, you know, in the first quarter, we had more than $7 trillion sitting in money market funds. We had $18 trillion, you know, in the collective market cap of the Mag Seven stocks, so there's $25 trillion sitting at these two extremes. And so if you're sitting in money market funds, and you're planning on retiring or rolling one-year Treasuries or just buying CDs, the problem is you're getting 4% on that money market this year. So if you had a million dollars and you're living off of that, well, you were getting 5% on it last year. You're getting 4% on it this year. 

So you went from a $50,000 paycheck to a $40,000 paycheck. That's a 20% pay cut. Have your expenses gone down in the last year? Not likely, and so that's the risk of being too short and too risk averse. The flip side is, you know, look at the swings that happen if you're so piled up in just this handful of names, you better have the stomach or the time frame to be able to hang on to that, and if you're really looking at your retirement, that's where it's so harrowing and fundamentally flawed.

LIZ ANN: Yeah, and one of the strategies that you write about and talk about, and certainly as part of your involvement with ThomasPartners, is dividend investing. So you titled a section in the report with "What the dividend investor knows." So share your thoughts on that.

DEANE: So, when you think about where you can get income, when you're talking about a retirement plan, there's really three sources for income. You can loan money, like bonds, bonds, money markets, that sort of thing. You're loaning money, you're getting fixed-interest payment, which is good. And today, by the way, you can actually get a yield. We've got Kathy to talk about that for us. You can sell for a higher price. You can buy an asset and get appreciation. And the third way is through ownership income.

And dividend-paying stocks offer exactly that. They offer a dual-reward system for clients. You can get rewarded through the dividends, which comes in slow and steady over time. And then you also have the potential for appreciation. And so the idea is if you have something that's getting you income streams, and income streams that are growing over time, that can be helpful.

But dividends aren't all created equal. There's no panacea here, "Hey, go buy dividend paying stocks." If you look at the spectrum of businesses out there, you can get all manner of them. But you should certainly … don't try this at home or not without some guidance and thought around it. But when we think about the volatility that we've had, getting back to the first comment you made about in the short term versus the long term, in the short term, we see the market moving all over the place.

And we lose sight of … we start thinking in recent headlines, "What's this business going to do?" We think businesses just fold up and go away, but they don't. Good, well-run businesses tend to sustain over time. And so I think there's about 55 or 56 stocks that fit in this family right now that have paid dividends and increased their dividends every year, going back 38 years plus on the list that we reference. But companies that have been around, and that means not only have they paid their dividends, but they've increased their dividends in 1987, in 2000 to 2003. They were raising their dividends in the middle of the great financial crisis from 2008. They raised their dividends during COVID. And those are pretty strong signals from that business. And they've raised their dividends every year in between. And so for retirees who are looking to structure their portfolio, this can be a very powerful piece in the overall plan where you have something that's going to be giving you something positive regardless of where markets go.

LIZ ANN: And there's a component of thinking about dividend strategies that is tied to mistakes that investors often make. And I provide this note of caution to investors if they're asking me specifically about how to look for dividend stocks. Never just screen in descending order for the height of the yield, because oftentimes it's actually reflective of some underlying problems with the company. So talk about the mistakes that investors can make when thinking about dividend stocks and how they fit.

DEANE: By the way, it's how we do everything, right? Once we've made a decision that this is a good idea, then we get a list of things, and the column we click on to sort that list is the yield column. And of course the highest yields come to the top, and it's the same if you're buying bonds or CDs or whatever. And there's usually the simple thing in the back of my mind is just my grandfather's words, which is, you know, "If it looks too good to be true, you know, something's going on there." It's, you know, why is this thing paying you more than something else? 

And to your point, when we think about businesses in general, businesses can manage all manner of things. The reason the yield might be so high is because something's fundamentally flawed with the business, and the market's already priced that in. The price is low. They may be subject to cut their dividends. In fact, if you were to take dividends and put them into their five quintiles, like the lowest dividends up through the highest-paying dividends, the worst-performing group you can find are those ones that cut their dividends. And it's that fifth quintile because they're filled with companies that are very prone to cut their dividends, which means something's wrong with the business. 

And so I think about dividend stocks like I would think about … imagine you had an orchard full of trees that bore fruit, like an apple orchard or something. There's going to be a number of trees that are kind of in those prime years where they're healthy and they're yielding you fruit, and they're probably yielding more fruit next year. And there's going be some of those trees that are old and diseased, and there's issues with them. So I think when we think about investing, it's really important, if you're going to be selective in this area, you really need to be thoughtful of, you know, "What's the quality of what I own?" versus "What's the, you know, sticker on the, hey, you get this thing?" Well, it should be reasonable.

LIZ ANN: I want to ask you one more question that I think is best answered probably with a story. And I know a lot of your stories. This one I don't, other than the bullet you shared with me. And it's about inflation. And we're all spending a lot of time focused on inflation right now because of the prospective impact of the trade war and tariff policy on inflation. 

I often talk about it in the context that, you know, some of the narratives around the tariff-related inflation is that this is not really an ongoing-rate-of-change hit to inflation. It's more likely to be a one time, you know, level step up in prices. But the rub with the latter, if it's accurate, is that's actually how most Main Street people think of inflation. They don't, we might be in the weeds on a monthly basis of versus headline measures of inflation, all the different inflation metrics that are out there. But I think the average Main Street person thinks, "Boy, stuff is more expensive now than it was, you know, fill in the blank, a year ago or pre-COVID." So I think you have a, a Greek and shaving story. So I'm curious about this one.

DEANE: So yes, it's funny you never heard this story, because almost everybody who's ever traveled with me has heard this. But when we think about inflation, there's Wall Street speak, and there's Main Street reality. Wall Street speak, when we talk about inflation, and there's good reasons for it, we're talking about the rate of change. And it's really the difference between last year's price increase and this year's price increase. 

LIZ ANN: Or last month, because it's all, you know, the inflation measures are often also done in month-over-month terms, right? 

DEANE: Exactly, but it's whatever. But the key is almost always it's a measure of how much was the increase? Well, over time cumulatively there's an increase. And even in benign inflation environments, we see the CPI go up generally every year. The only time the CPI goes down is usually when something really bad is happening. 

LIZ ANN: Consumer Price Index. I'm filling in the acronym. I've learned to do that. It's OK, Deane.

DEANE: So the cost we pay for things. So I always think about it in much more simple terms. We've had conversations about the fact that I'm Greek because of the weird spelling of my name. But when you grow up Greek, you usually grow up knowing a few things. Number one, it's usually a pretty busy, noisy, involved household. We eat incredibly good food. All Greek grandmothers are phenomenal cooks. I don't know what they do to take them off. 

LIZ ANN: I'm going to Greece for two weeks this coming summer for my first time. I'm going to have to, we're going to have to do an offline thing here or maybe do another podcast episode for people who are going to Greece or want to, but go ahead.

DEANE: So for me, it also means you start shaving sometime like in the third or fourth grade. And I always kind of joke about, said, "If I think about it in those terms, I've been shaving for four decades, plus I shave every day so I can clean my face and go to work." I use my Gillette razors. Not a plug for Gillette razors, I'm just a creature of habit.

And so now I sit back and think to myself, "What has Gillette razors done to me for the last four plus decades?" They changed the handles. They changed the blade. They changed the packaging. They changed everything about my experience according to them. According to their marketing, I'm having a better shave. But the only real difference is I get the same exact outcome. I just pay more money for it.

And the reality is when folks are worried about inflation as a concept, then it's just good to own a portion of your portfolio that owns all of the businesses out there that are actually collecting inflation. So being an owner of businesses over time, it's one of the reasons we own stocks in the first place. Why do we own stocks? We want to appreciate, and we want to have that participation with that stock ownership. And you don't get that in two weeks or two months. You just get that over time. It's part of the economy.

Prices are collected by these businesses, and if you're an owner of those businesses, that's going to turn up in their prices, of the prices of the things that you own. So when we talk about short-term, you know, sort of Wall Street prices thing, short-term, businesses collect things long-term. And when we have a good long-term sound strategy, you get to be an owner of those businesses for long periods of time, and they solve the problem all for yourself.

LIZ ANN: I'm going to ask you for sort of key takeaway and closing thoughts, but in the context of something I know you've heard me say for many, many years. I think there is this natural tendency, maybe exacerbated by what we're exposed to in the media, financial media, thinking that what matters to our success is trying to gauge what's going to happen in markets, in the economy, but I've always said that's inherently unknowable. It's not what we know, meaning about the future, what markets are going to do that matter. It's what we do along the way as investors and maybe a little less exciting to talk about than the, you know, "I think the next, you know, 15% move is going to be the downside or year-end price targets." So what would be the key takeaway from this conversation or in general when you're asked, "OK, sum it up for me," what do you generally say?

DEANE: You know, at the end of day, if you've got a good, thoughtful, well-built strategy, and you own the things you're going to own. The short term is always wild. I mean, you're spending, Wall Street spends its time rushing to guess what tomorrow's price is going to be. You know, that's the near-term function of Wall Street. But what really happens over time is it reflects what actually happened. 

So you know, the short term is always harrowing. You know, "This time is always different." And it is …

LIZ ANN: It is.

DEANE Because we don't know how it ends. Every time, if it was like before, we wouldn't think about it the same way, but the characteristics are the same. So to your point about the behavior, it's what we do along the way. And, you know, if you've got a well-structured plan, collect your income, be grounded in what you're doing, and frankly, go live your life instead of worrying about this other stuff. You know, there are resources to put you in a good place. You've probably done all the work. You know, most of the time, Liz Ann, you and I are talking with clients and, you know, the worries that are there are not supported by the financial situation that they're in. And so, you know, find ways to get some comfort around that and then put yourself in a position, you know, find the right strategy that you're comfortable with so that you can sort of erase the day-to-day and just live your life day-to-day and check on your portfolio from time to time. And we do the exact opposite.

LIZ ANN: Well, words to live by. So thrilled that you carved out some time to join us on our … on our lovely little pod here.

DEANE: Thanks, Liz Ann. Great to see you, as always, and thanks for having me on. Really a pleasure.

KATHY: Liz Ann, looking ahead to the next few days and early next week, what should investors be watching? What are you going to be watching in these markets?

LIZ ANN: Well, one of the things I think to pay attention to is the correlation[1] within the S&P 500 has really moved higher, meaning that stocks are acting in a more uniform way. So it is difficult to sort between the winners and the losers. But I think looking for that correlation to come down is often a sign that you're maybe heading into a better backdrop from a volatility perspective.

In terms of the economic data that's coming out, we're sitting in advance of some housing data, housing starts and building permits. Those are key leading indicators. I think unemployment claims on a weekly basis are really important to start watching, given that there is concern about some deterioration in the labor market. And that is a pretty key leading indicator and tends to lead other metrics like payrolls and the unemployment rate. We get the S&P Global version of the Purchasing Managers Indexes next week both on the manufacturing side and services side, and those are widely watched. We get more home-related data. We get new home sales next week as well. So especially given the volatility in longer-term interest rates and mortgage rates, not to mention the confidence problem that we're dealing with now, I think the housing data may be an important tell. How about you?

KATHY: Well, as you mentioned earlier, I'm going to be watching that data from the Treasury about international flows. It's a TIC. We call it the TIC data. It's Treasury International Capital System. And that'll be coming out in the next couple of days. So as you mentioned earlier, we're going to be kind of paying pretty close attention to what those flows were like. And in addition to all the data, I too am watching the correlations and in the Treasury market versus, say, the equity market. Who's where and doing what and why is going to be important, and whether the kind old relationships reassert themselves or whether we're looking at just a lot of skew in the data where you're not falling into any sort of a category that makes sense or in terms of historical analysis. So kind of looking to see do we reassert some of the old relationships, or do they continue to kind of jump around here, making it difficult to interpret what's going on.

So that's it for us this week. Thanks for listening. As always, you can keep up with us in real time on social media. I'm @KathyJones—that's Kathy with a K—on X and LinkedIn.

LIZ ANN: And I'm @LizAnnSonders on X and LinkedIn. I always do my PSA about imposters that I've had. Just in the last week, apparently it is now cell phones and AI generated voice of me, bots, whatever we're calling it, because a client reached out to me, fortunately, to say, "Hey, this isn't your number. I assume it wasn't you." So we're still dealing with this. So make sure you're following the actual me. I'm unlikely to just arbitrarily reach out to you by my cell phone, so assume it's probably a bot.

KATHY: You're not calling all the Schwab clients individually to chat with them? 

LIZ ANN: Well, you know, if I had time, I'd call and do what we're going to do now, which is ask for a review. If you are inclined to leave us a review, I won't call you and ask for one directly. But so, you know, we're always grateful if you can do that. You can also read all of our written reports, including that many include charts and graphs, at schwab.com/learn. 

KATHY: And we'll be back again next week with a new episode.

LIZ ANN: For important disclosures, see the show notes or visit schwab.com/OnInvesting, where you can also find the transcript.

[1] Positive correlation refers to a relationship in which two variables tend to move in the same direction (i.e., they both increase or both decrease at the same time).