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Investing Insights: IRA Tips, Cheap, Steady Dividend Payers

This week on the podcast, finding "fantastic" funds, Vanguard's inflation hedge, and the changing face of value investing.

Editor's note: We are presenting Morningstar's Investing Insights podcast here. You can subscribe for free on iTunes.

Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar. IRA season is upon us. Investors have until April 15 to make a contribution if they want it to count for the 2018 tax year. Joining me to share some tips if you are among those rushing in last-minute contribution is Christine Benz. She is director of personal finance for Morningstar.

Christine, thanks for joining today.

Christine Benz: Susan, it's great to be here.

Dziubinski: Good to see you. Now, we are about a month away from the deadline from making a contribution if you want it to count for 2018 and your first tip is that investors consider which might be the better fit for them, a traditional IRA or a Roth IRA. What are some of the things they need to be thinking about?

Benz: Right. So, you will hit that fork in the road if you are funding an IRA. One of the things to know is that income limits might make your decision for you. So, income limits: If you are someone who can contribute to a retirement plan at work, they are the most stringent for deductible IRAs. They are a little more generous for Roth IRAs. So, that might make your decision for you.

Assuming that you find yourself in the position where you can either make a deductible traditional IRA contribution or a Roth IRA contribution, the key thing you want to think about is your tax rate today at the time you make the contribution versus when you pull the money out in retirement. So, if you think that your tax rate is high today and you can make a deductible contribution, you are probably better off doing that--taking the tax break now because it's worth more to you than when you pull the money out in retirement and you are in a lower tax bracket. If the flip side is true, if you think you are in a relatively low tax bracket today and your tax rate is likely to go higher in the future, you are probably better off doing the Roth IRA contribution.

Dziubinski: Now, another tip for investors that you have is to not give up if you've been shut out of a Roth IRA.

Benz: Right. So, the income thresholds for Roth IRA contributions are pretty high, but high-income folks may find that they cannot make a direct Roth IRA contribution. So, the workaround there potentially is to take advantage of what's called a backdoor Roth IRA contribution. So, the idea is that you fund a traditional IRA, you can't deduct it on your tax return. If you earn too much to contribute to a Roth IRA, you automatically earn too much to make a deductible traditional IRA contribution. So, you fund this traditional IRA. It's a nondeductible contribution. Shortly thereafter you then convert to a Roth IRA, and there are no income limits on those conversions. So, it's a way for high-income folks to get some money into a Roth IRA account. You do want to get some tax advice here though because there maybe some tax consequences of doing this conversion. So, make sure that this is a good maneuver for you. Also, make sure to file what's called a Form 8606 to document that you made this contribution and also to document that you are not deducting it on your tax return.

Dziubinski: Got it. Now, another tip you have for investors is to not let analysis paralysis get in the way of deciding between the traditional IRA and the Roth.

Benz: That's right. And one thing to keep in mind is that you can reverse your contribution type. If it turns out that you made the wrong type of IRA contribution--for example, you made a traditional IRA contribution, but you really wanted to do Roth, you can actually change that later on. So, even though the recharacterization rules went away, which allowed you to change conversion, you can actually reverse an IRA contribution type. So, don't despair if it turns out that in hindsight you funded the wrong type of IRA.

Dziubinski: Got you. Now, another tip is, you know, many people will fund an IRA but then they don't necessarily invest it. Let's talk a little bit about that.

Benz: Right. Vanguard had some compelling research on this that showed people rush in the contributions to IRAs but then let the money sit there. They don't actually invest the money. Maybe they just are too busy, and they don't get the money invested in any sort of product. Well, especially if you are a person with a long time horizon until retirement, there's an opportunity cost if you are doing that year after year--if you are taking a while to get that money invested. One idea I think that you could take advantage of is simply use a target-date fund. If you don't know what you plan to invest in long-term, but you want to get the money working for you in sort of an age and situation-appropriate way, I think a target-date fund is a really good default.

Dziubinski: And the contribution limits did increase a little bit in 2019 from 2018. Is that right?

Benz: They did. So, in 2018, for people under 50, they are $5,500. They are going up to $6,000. For 2018, for people over 50, they are $6,500. Those are going up to $7,000. So, you can get a little more money working in tax-advantaged accounts for you.

Dziubinski: Then your last tip, Christine, is to help your loved ones get invested.

Benz: That's right. So, there's what's called a spousal IRA. If you have a nonearning spouse, you can make a contribution on his or her behalf. So, the name of the game is that you as the earning spouse just need to have enough income to cover both of your contributions. But that's an idea if you have a nonearning spouse in the family. And another tip to keep in mind is, if you have a child who has some earnings, you can actually contribute to a Roth IRA as long as the child has enough money to cover the contribution, enough earned income to cover the contribution. It doesn't matter whether your child has spent the money and it's long gone. You can fund the IRA up to whatever his or her earned income was last year. So, that's a trick to keep in mind to get young savers on the path toward retirement savings.

Dziubinski: Which is really important.

Benz: It is.

Dziubinski: Christine, thank you so much for your insights today. This is some terrific information this time of the year.

Benz: Thank you, Susan.

Dziubinski: Thanks. For Morningstar, I'm Susan Dziubinski. Thanks for watching.


Damien Conover: When looking at investing, dividend yield is really important, and in the large-cap pharmaceutical landscape there are certain stocks that have very strong yields. Both Pfizer and Bristol are these two stocks that we're highlighting today. Both stocks have been well positioned for growth, and both stocks do look undervalued with their dividend yields a little bit over 3%, and strong earnings growth, we think these are stocks that will not only provide good earnings growth, but provide a strong, secure dividend, and really the crux of this for both stocks is the next generation of drugs. 

For Bristol, they're very focused in oncology and also in process of acquiring Celgene, a deal that we think will go through, and support its overall economic moat. For Pfizer, it's a little bit more of a  diversified company. It is focused in oncology, but it's also focused in other areas. I'd say the overarching theme for Pfizer is looking at areas of unmet medical need, and that's really important for pricing drugs. With strong pricing, that should really fuel the earnings growth, and support Pfizer's overall dividend yield. 

When thinking about investing, I think it's important both for capital appreciation, but also the dividend yields perspective, and both these stocks, Pfizer and Bristol, look well positioned on both fronts.


Christine Benz: Hi, I'm Christine Benz for Which factors should you focus on to help select strong-performing mutual funds? Joining me to discuss that topic is Russ Kinnel. He is director of manager research for Morningstar.

Russ, thank you so much for being here.

Russ Kinnel: Glad to be here.

Benz: Russ, in Morningstar FundInvestor every year you've been compiling this list of funds based on some specific criteria--the basic goal there is to identify funds that you think will perform well into the future. So, let's start with the criteria that you layer on to arrive at this list of funds.

Kinnel: Yeah, just a few simple tests. I look for funds that have an Analyst Rating of Bronze or better, fees in the cheapest quintile, a Parent grade of Positive, returns over the manager's tenure above the benchmark, volatility is not high--it can be anything below that, it can be above average, but not high. Those are really the key tests that we are looking at.

Benz: So, in this most recent issue of FundInvestor, you examined the performance of these funds on a year-by-year basis. So, you've been doing this since 2012, and you look forward with each list just to see how they would have performed over the subsequent time period. Can you summarize the results?

Kinnel: Sure. I'll throw out the caveat that past performance is no guarantee of future results. So, no promises here. But yeah, I'm pleased with the results. So, at a minimum, each year's list had two thirds or better outperformed their peer group and in four out of six years a majority of the funds outperformed their benchmark. And even the two when it didn't outperform, it was around 45% that outperformed. So, I feel really good about those results.

Benz: OK. So, quickly outline the difference between category peers and benchmark. What's the difference?

Kinnel: That's right. So, if you're looking at a large-growth fund, then we are saying, for category peers did it beat the median large-growth fund. If you're looking at benchmark, then it would be the Russell 1000 Growth. So, of course, the category peers is going to be after costs and the benchmark is not. So, nine times out of 10, the benchmark is the higher hurdle and, of course, that was reflected in these results, too.

Benz: OK. So, when you look at the performance and when you look at the funds that performed particularly well, can you talk about commonalities among them and maybe highlight some of the better-performing funds that made the list year after year?

Kinnel: Yeah. You saw a lot of the same fund companies and the same funds pass the test every year or nearly every year and go on to produce really good results. So, you will see very high representation for American Funds, Vanguard, Dodge & Cox, Primecap, T. Rowe Price. These are all really well-run firms, really good stewards, but also they run at pretty low costs, too. So, they have a lot of good qualities.

Benz: OK. And then the list of funds that underperformed after appearing on the Fantastic--Whatever-Number--List. Let's talk about some of those. Did you identify any issues that you think were, sort of, recurrent themes among those that underperformed their category peers or their benchmarks or both?

Kinnel: Yeah. When you looked at the ones that were the worst of the performers, I think you saw quirky portfolios that then worked against them. So, for instance, Janus Henderson Overseas had some really aggressive bets that worked against it. FPA Capital had a sort of energy and cash position that worked for a while and then worked against it. So, I think a little quirkier, I think a little smaller firms where you also had manager changes. A lot of the successful stories were ones where you had a team-manage like American Funds or Dodge & Cox where you had a bunch of people. So, obviously, one manager change wouldn't be a big departure either in strategy or quality of management.

Benz: OK. So, people can go to FundInvestor to see the list of funds that made the cut for 2019, and they can also digest some of these results that we've just talked about. But for people who are embarking on fund selection on their own, what are some takeaways from this research that you think people can implement into their own fund-selection process?

Kinnel: Yeah. I think the fact that there are over 8,000 funds out there means you can really have a high bar. So, you can really let the screens do a lot of work. You can say, I want this and that. And I think it's important to note that my performance test was: The manager has to have been in there for five years or longer and outperformed over their entire tenure. Where people can get into trouble is by using those screening tools to look for good recent performers because that takes you in the wrong direction.

So, really focus on those fundamentals. And you can have a very high bar and it's going to get you down to a much more manageable list. If you are investing on your own, it can be pretty intimidating. So many funds, so many stocks out there. But all of a sudden, you get down to--it's often Fantastic 40-something. So, a pretty small number of funds and that really will help you to focus but also, as we said, a lot of these funds are there year after year because those strong qualities remain, and I think it can really help you to just go to a good list of funds. It's something that you can do a pretty close approximation using the screeners and some other screeners out there.

Benz: OK, Russ, interesting research. Thank you so much for being here to discuss it with us.

Kinnel: You're welcome.

Benz: Thanks for watching. I'm Christine Benz for


Erin Lash: Much angst across the consumer products landscape has centered on the ability of manufacturers to reignite the stagnant top-line performance that has plagued a broad swath of industry firms, and this was a main topic at the Consumer Analyst Group of New York conference in February. While we’ve been encouraged that rhetoric by management teams across the sector has pivoted of late from an outsize focus on the importance of cost-cutting to one more centered on bolstered brand investments to drive profitable and sustainable gains, the proof is in the pudding.

In our view, the challenge hasn’t merely resulted from the level of spend though, but rather extends to include the speed and agility at which established manufacturers are bringing value-added innovation to market. More specifically, it has historically taken anywhere from 18-24 months for leading brands to get a product from concept to shelf but smaller, niche startups have proven much more nimble in responding to evolving consumer trends. We posit that efforts to empower local leaders to a greater extent and employ “test and learn” launches (starting small, incorporating learnings, and rolling out on a broader scale) are a few interesting approaches to combating these headwinds.

From a valuation perspective, we’d suggest wide-moats Kellogg and Campbell Soup; each appear attractive, trading at more than 20% discounts to our valuation. Both operators are working to shed noncore businesses from their mix as a means to focus their resources (both financial and personnel) on the highest-return opportunities, which we view as prudent. 

Some operators, though, have withstood these headwinds, including wide-moats Clorox and McCormick. However, neither strikes us as attractive bargains at current levels, trading at 15% to 30% premiums to our fair value estimates. But we’d suggest investors keep each on their radar for a more attractive valuation.


Alfonso Bruno: Inflation-protected securities offer investors an effective hedge against inflation relative to traditional asset classes, such as stocks and bonds. Despite a lengthy U.S. recovery and historically low unemployment, inflation has remained stubbornly below that of the Federal Reserve’s 2% inflation target. This problem is only exacerbated when looking globally at other developed markets such as the eurozone and Japan, for example. Still, given that every investor is exposed to inflation, we believe that having a modest allocation to inflation-protected securities makes sense in many portfolios.

For this year to date through February 2019, the inflation-protected Morningstar Category is up 1.6%. Within that, Vanguard Inflation-Protected Securities fund is an excellent choice for investors looking for an inflation hedge. Unlike category peers, the fund will stay true to its Bloomberg Barclays U.S. Treasury Inflation Protected Index, despite an active approach, and does not court additional risk in areas like corporate bonds or commodities, for example. The fund’s extremely low fees and Vanguard's excellent stewardship solidify this fund’s place among the best within the category.


Christopher Franz: Hi, I'm Chris Franz with Morningstar. I'm here with John Rogers, chairman, CEO, and CIO at Ariel Investments.

John, thanks for joining me.

John Rogers: Great to be here.

Franz: So, John, you've had a really storied career as an investor, founding your firm in 1983. Maybe just talk about how value investing has changed over that time period.

Rogers: Well, a couple of things have changed that I think are pretty significant. One of the inspirations for me starting the firm was David Dreman, who wrote the Contrarian Investment Strategy and laid out a case of low P/E stocks typically outperformed for value investors. And that low P/E stocks had low expectations built into their price. And so, if there's an earnings disappointment, the stocks didn't decline too much. And that the growth stocks had too much expectation built into their price and when they disappointed, they got crushed.

As the years have gone on, I think, as value investors, P/E multiples have become less and less important. And even you can have low P/E stocks that will decline substantially on bad news, short-term earnings disappointments that will really crush a low P/E multiple stock. Maybe it's because it's in the wrong sector, maybe it's in the wrong index, maybe just the earnings announcements are so dramatic that the stock deserves to decline a lot.

One of the things that I think had enhanced that over the years is Reg FD has become so important. So, as you know, management teams now will not talk with analysts along the way and everyone has to wait for those quarterly results and those quarterly results could be purely bombshells. And so, I think that's been the major difference that buying a low P/E stock doesn't protect you the way it used to.

Franz: You know, it's been 10 years since the bottom of the financial crisis in March '09. Certainly, we've come a long way. But I'd be interested in your take on markets today.

Rogers: Well, we are still very, very enthusiastic. We think P/E multiples are modest for American companies and the small and midsize companies that I focus my career around. As we know, interest rates are still close to historic lows. And Warren Buffett always reminds us how important interest rates are to how you value companies. And as long as rates stay within this range, valuations are quite modest. And at the same time, there's still a lot of pessimism out in the marketplace. So many investment communities and investment professionals and individuals are still remembering the financial crisis and the Internet bubble bursting and have become so cautious and so risk-averse. And I think that often creates opportunity. So, being contrarians with the markets reasonably cheap with expectations so low and so much risk out there, fear of risk out in the marketplace, we think it's a great time to buy. There's a lot of cash and private equity also out there which we think is sort of a nice anchor. In case, companies disappoint, and they get cheap, private equity is there to step in and buy. So, we are in there buying today, feeling there's a lot of bargains and a lot of opportunities to really take advantage of the kind of market climate that we are into today.

Franz: Sure. Great. John, thank for your insight.

Rogers: You're welcome.

Franz: For Morningstar, I'm Chris Franz. Thanks for watching. does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.