Let’s begin with the fact that no investor can get around right now, the current volatile market. In the words of the Goldman Sachs strategist David Kostin, “The first six months of 2022 have been a brutal time to be an investor in public markets.” The losses, which stand at 19% year-to-date on the S&P 500, have been broad-based; barring outliers, neither value nor growth strategies have offered any respite.
Kostin dives into the current conditions, and comes up with some interesting views. He writes, “2022 has been a valuation-driven equity bear market rather than a decline prompted by lower earnings. Despite recession fears, S&P 500 consensus 2022 and 2023 EPS estimates have both been revised up so far this year.” But Kostin does note that there is a strong consensus pointing toward downward EPS revisions by year’s end, recession or no recession.
In this environment, Kostin is recommending that investors should go defensive, favoring stocks with a combination of high dividend yield and growth.
Against this backdrop, the stock analysts at Goldman Sachs have picked out stocks whose dividend payments are yielding above the market average. We’ve used the TipRanks’ database to pull up the data on two of these stocks. Let’s look into the details, along with the commentary from Goldman’s analysts, and find out what else these stocks have to offer.
Pioneer Natural Resources (PXD)
We’ll start with Pioneer Natural Resources, an Irving, Texas based hydrocarbon exploration firm working in the Permian Basin of West Texas. The Permian, in the past decade, has become one of the world’s major oil and gas production regions and has helped to put the Texas oil patch back on the global map. Pioneer’s holdings yielded over 637K barrels of oil equivalent per day in the first quarter of this year, and powered the company to its seventh quarter in a row of sequential revenue gains.
The Q1 top line was reported at $6.17 billion, which was up an impressive 152% from 1Q21; balanced against costs and expenses, this led to a net income of $2.01 billion, or $7.74 per diluted share. In addition to high revenues and earnings, Pioneer also generated plenty of cash, with Q1 free cash flow hitting $2.3 billion.
That last figure is of interest to dividend investors, since Pioneer boasts a high level of cash return to shareholders. The company reported returning 88% of Q1 free cash flow, through a combination of a 78 cent base dividend and a hefty variable dividend, which was set at $6.60 for the quarter. The combined dividend, assuming continued high variable payments for the rest of the year, annualizes to more than $29 per share and yields a powerful 13.7%.
The dividend and high capital return percentages caught the attention of Goldman analyst Neil Mehta, who writes: “We believe PXD is favorably positioned to generate attractive FCF given its differentiated undeveloped inventory (15+ years) in the core of the Permian. Also, given PXD’s strong balance sheet, we expect PXD to allocate the bulk of its FCF towards a capital return program including (1) 75%-80% towards fixed + variable dividend; and (2) remaining towards share repurchase. For 2022E/23E, we see PXD generating 19%/16% FCF yield and distributing a ~16% 1-yr forward dividend yield.”
Unsurprisingly, then, the 5-star analyst has a Buy rating on the stock, which he backs up with a $266 price target, indicating potential for 26% growth in the year ahead. (To watch Mehta’s track record, click here)
Overall, this stock has picked up a Moderate Buy rating from the Wall Street analyst consensus, based on 19 recent analyst reviews which include 13 Buys and 6 Holds. The shares are trading for $211.37 and the $303.68 average price target suggests a one-year upside of ~44%. (See PXD stock forecast on TipRanks)
Phillips 66 (PSX)
The second dividend stock we’ll look at is one of the oil and gas industry’s major players, Phillips 66. This oil major boasts a $38 billion market cap and more than $111 billion in annual revenues. The company has its hands in multiple aspects of the hydrocarbon business, including the refining, midstreaming, and marketing of a wide range of fuels, fuel oils, and lubricating oils, as well as the industrial chemical industry, including petrochemicals.
Rising oil prices over the past 12 months have been a boon for the industry as a whole, and Phillips 66 has been no exception to that rule. The company’s 2021 revenues were up 75% year-over-year, and the top line in 1Q22, at $36.6 billion, was up 12% from 4Q21 and 70% from 1Q21. Earnings, which are more volatile, came in at an adjusted total of $595 million for the quarter, giving an adjusted EPS of $1.32. While down from the Q4 number of $2.94, the Q1 earnings were a large turnaround from the $1.16 per share loss reported in the year-ago quarter.
On cash flow, Phillips 66 reported a total of $1.1 billion in cash from operations during Q1. This funded some $370 million in capital expenditures and investments – without skimping on the dividend, which was funded to the tune of $404 million. The company, which held $9 billion in cash reserves at the end of the quarter, announced the restart of an existing share repurchase program, with $2.5 billion authorized.
Dividend investors will be pleased to note that Phillips 66 raised its dividend payment in the most recent declaration, to 97 cents per common share, which was paid out on June 1. At the current rate it annualizes to $3.88, and yields 5%, well above the ~2% average yield found among dividend payers in the broader markets.
Checking in with Neil Mehta once again, we find he has published an upbeat view of PSX for Goldman, saying of the company, “Phillips 66 remains our top idea within our US refining coverage. With the stock having underperformed large cap peers MPC and VLO by ~40% over the last 12 months, we do not believe the market is giving credit for the positive inflection in PSX earnings, cash flow, and capital returns we expect to see in 2022/2023…. Overall, we see 38% total return to PSX vs the large cap peer average of 14% and the refining sector average of 20%.”
Mehta’s comments back up his Buy rating on the shares, while his $109 price target implies they have a 40% upside ahead for the next year.
Phillips 66 claims a Strong Buy rating from the analyst consensus, based on 10 reviews that break down 9 to 1 in favor of Buy over Hold. The stock is trading for $77 and the $111.90 average price target suggests a 45% one-year upside potential from current levels. (See PSX stock forecast on TipRanks)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
American Weed Stocks Are Cheap. They’re About to Get a Sales Bump.
How Do Mega Backdoor Roths Work?
A mega backdoor Roth is a unique 401(k) rollover strategy that’s designed for people whose incomes would ordinarily keep them from saving in a Roth Individual Retirement Account. The advantage of using a Roth IRA to save for retirement is being able to make tax-free qualified withdrawals. But not everyone can contribute to these accounts; higher-income earners are excluded. That’s where the mega backdoor Roth comes into play. If you have a 401(k) you’d like to roll over, you could use this strategy to enjoy the tax benefits of a Roth IRA without having income be an obstacle.
Make sure you’re taking advantage of every opportunity to maximize your retirement assets by working with a financial advisor.
Roth Account Basics
Before diving into the specifics of a mega backdoor Roth, there are a few things to know about Roth accounts, including Roth IRAs and Roth 401(k)s.
First, these accounts are both funded with after-tax dollars. That means when you make qualified withdrawals later, you won’t pay income tax on the money since you already paid it upfront. This is the key characteristic of Roth accounts and what makes them so appealing to investors who anticipate being in a higher tax bracket at retirement.
Next, your ability to contribute to a Roth 401(k) is not restricted by your income. But it is for a Roth IRA. For the 2021 tax year, you must be within these modified adjusted gross income limits to make a full Roth IRA contribution:
Single filers: MAGI of $125,000 or less
Married filing jointly: MAGI of $198,000 or less
Head of household: MAGI of $125,000 or less
You can make partial contributions above those income limits. But your ability to contribute phases out completely once your MAGI hits $140,000 (if you file single or head of household) or $208,000 if you’re married and file a joint return. For 2021, the full contribution allowed is $6,000 with a $1,000 catch-up contribution for savers aged 50 and older.
Finally, Roth 401(k) accounts are subject to required minimum distribution rules just like traditional 401(k) accounts. This rule requires you to begin taking money from your 401(k) starting at age 72. A Roth IRA, on the other hand, is not subject to RMD rules.
What Is a Backdoor Roth?
A backdoor Roth offers a work-around for people whose incomes are above the limits set by the IRS. When you execute a backdoor Roth, you roll money over from a traditional IRA to a Roth account. This way, you won’t have to pay taxes on your retirement savings in the Roth IRA when it’s time to make withdrawals. And you’re not subject to required minimum distribution rules either.
But there is a catch. You have to pay income tax on the money you roll over to a Roth account. So while you could save money on taxes in retirement, you’re not escaping the tax liability of a traditional IRA altogether.
How a Mega Backdoor Roth Works
A mega backdoor Roth is a backdoor Roth that’s designed specifically for people who have a 401(k) plan at work. This type of backdoor Roth allows you to contribute up to $38,500 to a Roth IRA or a Roth 401(k) in 2021. This is in addition to the regular annual contribution limits the IRS allows for these types of accounts. To execute a mega backdoor Roth, two conditions have to be met. Your 401(k) plan needs to allow the following:
You can ask your plan administrator whether your 401(k) meets these criteria. And if your plan doesn’t allow for in-service withdrawals or distributions, you could still attempt a mega backdoor Roth if you plan to leave your job in the near future.
If your plan meets the criteria, then you can take the next steps to execute a mega backdoor Roth. This is typically a two-step process that involves maxing out after-tax 401(k) contributions, then withdrawing the after-tax portion of your account to a Roth IRA.
Again, whether you can follow through on the second step depends on whether your plan allows in-service withdrawals. If it doesn’t, you’ll have to wait until you separate from your employer to roll over any after-tax money in your 401(k) into a Roth IRA.
You also need to watch out for the pro rata rule. This IRS rule says you can’t only withdraw pre- or post-tax contributions from a traditional 401(k). So if you’re completing a mega backdoor Roth, you couldn’t just withdraw post-tax contributions if your account holds both pre- and post-tax funds. In that case, you may have to roll over the entire balance to a Roth IRA.
Benefits of a Mega Backdoor Roth
There are three key benefits associated with executing a mega backdoor Roth. First, you can contribute significantly more to a Roth IRA upfront this way. For 2021, the contribution limit is $38,500 on top of the regular annual contribution limit and any catch-up contribution limits that may apply.
You’ll need to know the maximum amount you’re allowed to contribute to the after-tax portion of your 401(k). So for 2021, the IRS allows a maximum contribution of $58,000 or $64,500 if you’re 50 or older. You’d subtract your 401(k) contributions and anything your employer adds in matching contributions to figure out how much you could add to the after-tax portion.
Next, you can enjoy tax-free withdrawals in retirement. This is a benefit you may otherwise not being able to get if your income is too high to contribute to a Roth IRA. By reducing your tax liability in retirement, you can help your investment dollars go further. And you may have a larger legacy of wealth to pass on to future generations.
Finally, a mega backdoor Roth IRA would allow you to sidestep required minimum distribution rules. This means that you could retain control over when you choose to take distributions from a Roth IRA.
So who is a mega backdoor Roth right for? You may consider this move if you:
Have an eligible 401(k) plan at work
Have maxed out traditional 401(k) contributions
Are not eligible to contribute to a Roth IRA because of your income
Have additional money that you want to invest for retirement
Want to leverage the higher Roth IRA contribution limits allowed by a mega backdoor rollover
Talking to your financial advisor can help you decide if a mega backdoor Roth makes sense. And your 401(k) plan administrator should be able to tell you if it’s possible, based on your plan’s guidelines.
Mega Backdoor Roth Alternatives
If you can’t execute a mega backdoor Roth because your plan doesn’t allow it, there are other ways to increase your retirement savings. For example, you could try a regular backdoor Roth instead. This might be something to consider if you still want to enjoy the tax benefits of a Roth IRA but your plan doesn’t fit the criteria for a mega rollover. You could also elect to make Roth 401(k) contributions to your retirement plan at work. This way, you still get the benefit of contributing after-tax dollars and making tax-free withdrawals. You’d be subject to the regular contribution limits and you’d still have to take the required minimum distribution. But that may outweigh the value of tax savings in retirement.
Investing in a Health Savings Account (HSA) is another option. While these accounts are not specifically designed for retirement, they can yield multiple tax benefits. Contributions are tax-deductible and grow tax-deferred. Withdrawals are tax-free when used for eligible healthcare expenses. And at 65, you can take money out of an HSA for any reason without a tax penalty. You’ll just owe ordinary income tax on any withdrawals that are not used for healthcare expenses.
Finally, you could open a taxable brokerage account to invest. This doesn’t necessarily save you money on taxes since you’ll owe capital gains tax when you sell investments at a profit. But it could help you to diversify your investments and there are no limits on how much you can invest in a brokerage account annually.
A mega backdoor Roth strategy could work well for higher-income earners who want to take advantage of Roth account benefits. There are certain rules that need to be followed to make it work, however, so you may want to talk to your plan administrator or a tax professional before going ahead. Keep in mind also that even if you can’t complete a mega backdoor Roth rollover, you still have other options for growing retirement savings.
Tips for Retirement Planning
If you’re saving for retirement in a 401(k) or IRA, pay attention to the fees you’re paying. For instance, check the expense ratios for each fund you’re invested in to understand how much you pay to own that fund on an annual basis. You can then compare that to the fund’s performance to determine whether the fees are justified. Also, consider any administrative fees you might be paying and how those affect your net returns.
Consider talking to your financial advisor about a mega backdoor Roth and whether it could be right for you. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors in your local area. You can get your personalized recommendations in minutes just by answering a few simple questions. If you’re ready, get started now.
Photo credit: ©iStock.com/designer491
Alibaba Is Tumbling. Chinese Tech Stocks Have a New Headache.
Chinese tech stocks were tumbling on Monday as two of the embattled sector’s leading players faced fresh fines from market regulators over disclosure rules.
China’s State Administration for Market Regulation announced Sunday a wave of penalties for improperly reporting past deals, in breach of competition law.
(ticker: BABA) and
(0700.H.K.) were among the companies fined as a result.
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