The Head and Shoulders Pattern: How to Trade Tops and Bottoms
Tag: microsoft stock
The Head and shoulders pattern is a reversal trading strategy, which can develop at the end of bullish or bearish trends. It is often referred to as an inverted head and shoulders pattern in downtrends, or simply the head and shoulders stock pattern in uptrends. In theory, they foretell the slowing momentum in either direction as the stock is unable to put in further highs or lows.
Traders like to trade head and shoulders patterns as the price targets are very predictable and the formation has an overall high success rate.
What do Head and Shoulders Chart Patterns Look Like?
The head and shoulders chart formation consists of three peaks, which develops after a strong bullish trend. The first and last peak are approximately the same height and are classified as the shoulders.
The second peak is the highest of the three and is classified as the head of the pattern.
Head and shoulders charts represent the transfer of power from the bulls to the bears in a topping pattern. In essence, it is a distribution pattern. Bulls who were buying the breakout (head), provided the liquidity for larger players to sell into, thus bringing the stock back down.
Please see the below illustration of a head and shoulders pattern top:
Head and Shoulders Top
What Do Inverse Head and Shoulders Chart Patterns Look Like?
Conversely, the inverted head and shoulders pattern is the head and shoulders bottom.
Instead of peaks, there are troughs. This reversal pattern develops after an extensive bearish trend and represents the transfer of control from bears to the bulls. Like the topping pattern, here bulls are using the breakdown as an opportunity to go long at lower prices. It could also give longer term bears the liquidity to cover their positions.
Below is an illustration of a head and shoulders bottom:
Head and Shoulders Bottom
This is an outline of the inverse head and shoulders pattern. As you see, it is the mirror image of the head and shoulders topping pattern.
Identifying the Neckline in a Head and Shoulders Pattern
Every technical chart pattern has a trigger line, which provides confirmation for entering or exiting a trade.
For the head and shoulders pattern, the trade signal is called the neckline.
When you think about it, this name makes sense, because the neckline is directly beneath the head and shoulders. Get it?
When we identify the pattern on the chart, the first thing we should do is to draw the neckline.
So, how do we draw the neckline?
The proper way to set up your neckline is to connect the two peaks or troughs (depending on if it’s a top or bottom). Here’s an example with $CEI:
$CEI head and shoulders pattern example
Please note the neckline isn’t always flat. If the peak or trough values are slightly different, then the neckline could have a slope.
We’ve tried to give you two examples of an early entry “Neckline A” and a later “Neckline B”. Both would work. It will depend on you and your style to outcome test head and shoulders chart patterns for the best entry.
What do Head and Shoulders Stock Patterns Foretell?
To determine the size of the formation, you should first set up the neckline as we just discussed.
Then, you take the mid-point of the neckline and draw a vertical line connecting the mid-point of the neckline to the top of the head. The distance between the neckline mid-point and the head is the distance we expect the stock to run after breaking through the neckline.
Please note, measuring price targets for head and shoulders and inverted head and shoulders will mirror each other. Again, the only difference is the formations are inverted.
How to Trade a Head and Shoulders Chart
When should you open a position?
When you identify the formation, you should start looking for the signal you need in order to enter the market. This signal is the moment when the price breaks through the neckline, for all intents and purposes.
When the neckline is broken, you should open a short position for head and shoulders tops and a long position for head and shoulders bottoms.
Granted, this is the old-school way to trade the pattern. Educators like Gil Morales teaches you to short into the pops on the right shoulder. He likes to find weaknesses into the overhead moving averages for good risk/reward.
This is a tricky question as traders’ opinions are pretty controversial regarding stop loss placement for the pattern.
Some traders claim that the stop loss should be loose and placed just above the head of the pattern.
A more conservative approach used by traders is to place the stop loss beyond the shoulder peak/trough.
We prefer placing the stop loss above the shoulder, as placing the stop above the head provides a 1:1 risk reward ratio. This isn’t very favorable odds.
When should you collect profits – Reverse Head and Shoulders Pattern Example 1
Again, the rule of thumb for this pattern is to determine the price target based on the depth of the pattern.
If this sounds confusing to you, have a look at the image below:
Price Target
This is a classic inverted head and shoulders scenario. This is the 30-minute chart of Apple. First, we have a bearish market followed by the creation of an inverted head and shoulders formation.
You can see the neckline – the brown line. Once the neckline is broken to the upside, we were able to set our price target based on the depth of the neckline to the trough of the head, which is represented with the black arrow.
After we establish our long position, we place our stop loss below the last shoulder as shown in the image.
After 24 hours, our minimum target is reached and we exit the position after the first bearish candle circled in green.
This inverted head and shoulders formation brings us a profit of $2.20 per share with the Apple equity.
While we exited this position near the target, you should not exit your position if the price continues to move in your favor.
Reverse Head and Shoulders Target Example 2
Having fun? Let’s go through another example.
Price Target
This is the 30-minute chart of Facebook.
After a strong downtrend, an reverse head and shoulders pattern develops. Again, we identify the neckline by drawing a brown line across the shoulders.
We open a long position with the first candle that closes above the brown neckline. Meanwhile, we establish our minimum target, which is illustrated with the black arrow.
After a few days, the price reaches our minimum target, but we stay with our long position until our bearish signal develops. For more information on bearish candlestick patterns as entry and exit signals, visit our guide to candlesticks.
A few hours later, a hanging man develops and we close our long position. From this long position, we were able to generate profits of ~ $4.00 per share.
When does the Head and Shoulders Pattern Fail
Although head and shoulders are considered one of the most reliable chart patterns for equity trading, like any other chart technique – it can fail.
Sometimes, we will receive our confirmation signal and the price does not reach our minimum target.
In other cases, the price will confirm the formation by breaking the neckline, and we will see absolutely no movement in our favor. These cases are not rare at all.
Pattern Failure
This is the 60-minute chart of Toronto-Dominion Bank. After a steady downtrend, an inverted head and shoulders formation develops.
We establish the neckline, price target, and stop loss, which are best practices for identifying the formation.
Unfortunately, after opening a long position, TD Bank begins to retreat below the neckline and ultimately trips our stop-loss order.
From this position, we accumulated a loss of ~52 cents ($0.52) per share. Although all the symptoms of an effective pattern are there, things didn’t work out.
This is why it is important to respect your stops!
Day Trading Head and Shoulders Tops
The first thing to consider when day trading this pattern is that it requires time. Unless you are on sub-minute charts or tick charts, you will likely need two days worth of bars or an early afternoon set up for the formation to fully develop.
Like any other trading setup, you will need more than just the chart pattern to be a success. Some of these items include proper money management and a firm understanding of risk on each trade.
Back to an intraday example, check out this head and shoulders chart of RPM.
Intraday Chart Example
You can see the setup is the same as all the other charts previously discussed, even though the chart is on a 5-minute time frame.
The key point, again, is that you will need to let the trade setup. It’s not like an opening range breakout with 4 or 6 candles after a major gap. It takes time.
This pattern requires you to let the trade come to you, which takes extreme patience. The positive is that the reward from the trade is significant because the “cause” built up before the move creates a large “effect,” typically. There are many traders on both sides of the trade placing real money on the line.
The key is, after the break of the neckline, managing the trade properly. This means placing your stop above the recent peak or trough point. Also, it means adding to the position as it goes in your favor, all while managing a core position.
Key Summary Points on Head and Shoulders Chart Patterns
Head and shoulders tops and bottoms are reversal chart patterns.
It is one of the most reliable technical formations.
Inverted head and shoulders can reverse a bearish trend to bullish.
You will need to identify the formation, neckline, and stop loss levels.
Open a position when the price breaks through the neckline.
Advanced/Early entries can be taken on pops into the moving averages on the right shoulder
Place a stop loss order on the edge of the last shoulder.
The price target for the formation is equal to the depth of the neckline to the head of the formation.
When the price target is met, stay with the position until a contrary signal develops.
The pattern can fail, so don’t get too sure of yourself.
Use a global news source to understand the financial impacts outside of your market which can impact the trade.
How Can TradingSim Help
As with any strategy, we never recommend putting your money to work without testing the setup first. Ideally, you’ll want a set of as many simulated trades as possible in order to know your probability for success.
In other words, don’t take our word for it. Jump in the sim, scan for reversals both long and short, and track them in the analytics page. This way, you’ll know ahead of time what your realistic outcome expectancy can be.
Along the way, be sure to study which areas provide the best points of entry for your specific head and shoulders pattern strategy.
Here’s to good fills!
Having a Roth IRA can be beneficial to account holders. However, if an account holder wants to make a withdrawal after they start investing, there are certain rules they have to follow. This TradingSim article will help people determine how they can make IRA withdrawals, even if they have a backdoor IRA. This article will also help Roth IRA owners whether they’re employed with a company or have a small business. This article will also highlight 10 stocks that Roth investors can add to invest with their accounts.
What are the rules for a Roth IRA withdrawal?
With the COVID-19 crisis, many people are having financial difficulties. Many people want to withdraw from their accounts to pay bills or take care of other expenses. When an account holder wants to make a withdrawal from their Roth IRA, they can easily make that choice. Financial expert Andy Robinson noted that account holders can make Roth IRA withdrawals.
“Your money isn’t untouchable. When you contribute to an IRA, your money isn’t locked away in some unattainable place. It’s not as easy to access as your checking account, but it is accessible,” wrote Robinson.
“I know that experts [say] “Don’t touch your retirement savings,” but there are a lot of exceptions where you can actually use that money if you run into real problems. It’s not locked up forever. Yes, you will have to pay some penalties on it, depending on how you’re using it, but if you need that money, it’s there, and it could be a safety net,” wrote Robinson.
“It’s also worth noting that if you use a Roth IRA, you can withdraw any contributions from it at any time, penalty-free,” wrote Robinson.
Some financial advisors say not to make Roth withdrawals
While some financial experts say it’s OK to make Roth withdrawals, others disagree. Riley Poppy is a financial planner and owner of Ignite Financial Planning in Seattle. He says that before making Roth withdrawals, account holders should try other options.
“Evaluate a personal loan, depending on what type of interest rate you might build a qualify for,” said Poppy.
“If you have investment accounts, you should think about liquidating taxable accounts first. traditional IRAs and 401(k)s second, and Roth IRAs last,” said Poppy.
“Consider taking money first from pre-tax accounts or traditional retirement accounts before Roth IRA accounts,” added Poppy..
“You have a little bit more flexibility since you can take out different shares. and you can really control the tax consequences a little bit better,” said Poppy.
Roth IRA withdrawals can help account holders
Consulting a financial advisor is key to Roth
While Poppy doesn’t recommend Roth IRA withdrawals to his clients, he does see the advantages of Roth IRA withdrawals.
“If taking from a Roth IRA, it can be beneficial since you can access your basis or contribution tax-free without penalties,” said Poppy.
Financial advisor can help people decide how to make Roth IRA withdrawal
“Input from a good CPA and a good financial planner is really helpful. [They can help] you model it out in terms of what the impact long-term will be,” said Poppy.
“The key thing to remember is that you are reducing your future retirement income. Do you have a plan to replenish that?” said Poppy.
Can a Roth IRA withdrawal buy a home?
If a person needs extra money, they can use Roth IRA withdrawals to buy a home.
Eric Roberge is the CEO and lead advisor of Beyond Your Hammock, a a fee-only financial planning firm. He noted that Roth withdrawals can be used to purchase a home.
“If you no longer need your Roth IRA money for retirement, then you may be able to tap the account to generate the cash needed for the purchase,” Roberge says.
Jeffrey Levine is a certified public accountant (CPA) and the director of advanced planning with Buckingham Strategic Wealth. He said that if a person can take Roth withdrawals to buy a home with certain requirements.
“As long as your Roth IRA has been established for at least five years, you can use that money penalty-free for a home down payment. as long as it qualifies as a first-time home purchase,” said Levine.
“The nice thing about Roth IRA withdrawal is that the contributions you originally make can be withdrawn for anything. at any time without penalty. It’s when you get into the earnings that you run into trouble, ” said Cohen.
While a person can use the funds to buy a home, Cohen notes that “even if you keep contributing to another retirement account, taking money out of a Roth to buy a home incurs opportunity cost”.
“If you’re using the Roth because that’s the only source of funding you have to make the purchase, that might be a red flag. If you’re stretching yourself financially to buy a house, then buying might not be the best idea,” said Roberge.
What is the difference between traditional and Roth IRA withdrawals?
While both traditional and Roth IRA’s are both retirement accounts, there are differences between the withdrawals. In a traditional IRA, there are no penalties to withdrawals unless a person makes the withdrawal before they’re 59 1/2. Mike Piershale is president of Piershale Financial Group. He said that while there are penalties for traditional IRA withdrawal, there are exceptions.
“On a traditional IRA, generally you can’t withdraw until 59 ½, although there are all sorts of exceptions,” said Piershale.
Some of the exceptions include medical expenses and disabilities.
“When you retire, often people have what I call this ‘window of opportunity,’ where they have low-income years,” said Piershale.
Piershale said the first years of retirement are a good time to convert funds from a traditional IRA to a Roth. He said that an account holder shouldn’t convert too much or else they will get bumped up to a higher tax bracket.
“Convert just enough to keep you in the same tax bracket,” said Piershale.
With a traditional IRA, an account holder has to make required minimum withdrawals (RMD’s) at 70 1/2. Leslie Thompson is a certified financial planner at Spectrum Management Group. She said that account holders should consider their individual accounts before making withdrawals.
“You have to look at accounts collectively and individually. Each account can have its own distribution amount. [The RMD] is where a lot of mistakes happen,” said Thompson.
“Because you’re taking money out early, your RMD at age 70 ½ will be less. The lower RMD could then result in lower taxes. That’s a strategy we use quite often because many people have a good portion of their assets in qualified retirement plans,” said Chamberlin.
“It has implications for what you pay for Part B premiums,” said Thompson. “Higher-income people pay more,” added Thompson.
Roth IRA withdrawals have more options for account holders
While traditional IRA holders face penalties, Roth IRA holders don’t face as many penalties. If an account holder had an account longer than five years, have a medical emergency, or are a first-time homebuyer.
CARES Act helps make Roth IRA withdrawals easier
The passage of the CARES (Coronavirus Aid Relief and Economic Security) Act in March enabled account holders to make premature Roth IRA withdrawals. Dara Luber is the senior manager of retirement product at TD Ameritrade. She noted that with the bill’s passage, there are no required minimum withdrawals in 2020.
“One of the biggest provisions of the CARES Act is that there are no required minimum distributions (RMDs) for 2020. If you don’t need to take the money, you won’t have to,” said Luber.
Luber notes that there are penalty-free withdrawals if a person has been affected by coronavirus.
“Normally, you’d need to be at least 59 1/2 to take penalty-free withdrawals from your accounts,” said Luber. “However, under these rules, if you, your spouse, or a member of your family has been impacted by coronavirus, you may be able to take out money without paying that 10% penalty as long as you do it by December 31, 2020.”
Roth IRA withdrawal can benefit account holders
Mat Sorenson is the CEO & Attorney at Directed IRA & Directed Trust Company. He explained the new Roth IRA withdrawal rules.
“The new law increases the dollar amount you can loan yourself from your own 401(k) from $50,000 to $100,000 and also creates a penalty-free early distribution rule whereby IRA or 401(k) account owners under age 59-and-a-half can take a penalty-free retirement account distribution of up to $100,000,” wrote Sorenson.
Financial expert Michelle Singletary noted that people can repay the loan withdrawals within three years.
“You can repay all or a portion of the distribution within three years, and the repayments will not be counted toward the annual contribution limits”, said Singletary.
“Additionally, the waiver covers the first RMD, which individuals may have delayed from 2019 until April 1, according to a summary of the Act’s provisions by Fidelity Investments,” noted Singletary.
Relaxed limits on Roth withdrawals are key in COVID-19 era
“In effect, the [CARES ACT] allows you to borrow up to $100,000 from your IRA(s) and repay the amount(s) any time up to three years later with no federal income tax consequences. And there are no limitations on what you can use [coronavirus-related distribution] funds for during the three-year period,” said Bischoff.
The “CARES Act” relaxes the rules on tapping retirement accounts, but only up to a $100,000 cap. If you take more than that, you’ll be subject to the old familiar tax and penalty rules.
If you have a Roth IRA, you have already paid income tax on that money, so any withdrawal won’t be subject to taxes now. In other words: get “post-tax” money before you tap into any “pre-tax” money.
Financial expert Suze Orman says Roth IRA withdrawals may not be wise
While many people may want to make Roth IRA withdrawals for extra money, financial analyst Suze Orman advises against that decision.
“If you take the money out, you’re racking in a 20-some percent loss right now, and you’re going to pay income taxes on that money, which will be another 20% or so,” said Orman.
“If you take that money out and spend it, if you’re not frugal, if you’re just still living your lifestyle on some level, you will miss the best opportunity and the best time to have your money in the market that there’s ever been in about 10 years,” added Orman.
Top 10 Stocks for Roth IRA investors
1. Apple
While Orman argues that the stock market will rebound, here are 10 stocks that can be a good investment for Roth IRA’s. Apple (NASDAQ:AAPL) stock should rise after the launch of its latest iPhone.
Apple stock a good option to replace IRA withdrawals
“If we look at year to date, the stock has done extremely well. In fact, it has outperformed the Nasdaq, the S&P 500, the broader markets, it has rallied. … Simply put, Apple during this pandemic is generating a tremendous amount of cash flow. They’re inventing, they’re coming out with new products and … they’re hiring. A lot of industries are laying off people and doing furloughs and reductions of … hours of workers, we’re actually seeing that Apple is hiring,” said Suva.
“That means they’re coming out of the pandemic stronger and importantly, the products that you’re showing that Apple announced are going to be ready and on the shelves and available in large quantities for the holiday shopping season and that’s very important,” added Suva.
“What is the benefit for normal consumers? Where are they going to feel the faster speeds? And regardless of if everything works perfectly, right, we’ve got good hardware, good network and you can get 5G all the time, what do you use the faster speeds for on your phone? Where is the answer to that question is the big thing. [CEO Tim] Cook did point out downloads,” said Stern.
“Certainly downloading video, downloading music, that’s going to be faster. They also did a lot of gaming demos where you can see things instantly rendering and talking about how this would be faster than your home Wi-Fi. That’s another good thing for some consumers, certainly, but the killer app, which is what this is all about, we don’t know yet and this is why Apple is betting and that’s why … the carriers need Apple to bet because it’s all about the new era,” added Stern.
Krish Sankar is the senior research analyst at Cowen. He said 5G could give Apple stock a boost.
“I would say in terms of the overall event a lot of the specs are largely in line with what the supply chain had been telegraphing for a long time. I thought the price point was very attractive although there was some speculation of the pricing late last week, so largely overall I’d say in-line event. … We did a survey where we found a lot of respondents will be willing to upgrade their smartphones because of 5G. We just think that actually this 5G could be a longer, stronger cycle,” said Sankar.
Apple is a great stock to add to Roth IRA investments.
2. Amazon
In addition to Apple, Amazon has boomed in the wake of COVID-19. Mizuho analyst James Lee said Amazon is a buy because of consistent sales.
“From our proprietary checks using Searchmetrics, U.S. search traffic maintained a consistent growth rate compared to 2Q20 at 14% [year-over-year],” Lee wrote in a note to clients. “With conversion rates rising during the pandemic, we believe that 3Q20 is tracking ahead of consensus revenue growth of 32% YoY, or 8 points of deceleration compared to 2Q20, partially due to the rescheduling of Prime Day this year, ” said Lee.
Amazon stock is a top choice for Roth IRA withdrawal replacements
“By pulling some demand forward, the company is able to smooth out the peak in demand somewhat as it spreads it across a longer period, and exert less pressure on its fulfillment network, while still recognizing all the revenues in the fourth quarter. This is all the more important that with Covid-19 and the need for social distancing, consumers are likely to avoid the rush on physical stores, which typically starts around Black Friday weekend, and instead turn to online to satisfy their shopping needs,” said Lee.
Amazon is a key stock to add to a Roth IRA investment.
3. Netflix
Another stock that’s benefitted from COVID-19 is Netflix (NASDAQ:NFLX). As more people quarantined, they watched the streaming service more than ever.
Steve Chiavarone is a portfolio manager, equity strategist, and vice president at Federated Hermes. He noted that Netflix is performing well because movie theatres are suffering as the coronavirus keeps people home.
“Cinemas are just a really tough space,” said Chiavarone.
Netflix is a top buy to supplement Roth IRA withdrawal
Chiavarone notes that Netflix stock is a growth stock that has staying power.
“The trend towards streaming is certainly in place,” he said. “We’ve seen a lot of the studios change their agreements where you’re now going to have a shorter period of exclusivity in the cinemas before getting programs onto streaming channels. I think in general the space is well-positioned. I think Netflix is the leader in that space and I think the secular trend is at their back,” said Chiavarone.
“NFLX offers consumers an increasingly compelling unique entertainment experience on virtually any device, w/o commercials at a still relatively low cost. The company appears to operate in a virtuous cycle, as the larger their subscriber base grows (and their average revenue per user increases) the more they can spend on original content, which increases the potential target market for their service (and reduces existing subscriber churn) + enhances their ability to take future price increases (they are due for an increase as early as Jan 2021) and dramatically increases barriers to entry”, said Wlodarczak.
If an account holder wants to supplement their Roth IRA withdrawal, they can choose Netflix stock.
4. Zoom
Another stock that is a top pick for Roth IRA’s is Zoom (NASDAQ:ZM). The videoconferencing company is a ubiquitous presence since people have to work and attend school from home. BTIG analyst Matthew VanVliet says Zoom is a buy.
Zoom stock is a top stock to supplement Roth IRAs
“Overall the growth of the company has been unprecedented but as it expands well beyond a video-conferencing tool into a core human interaction platform forever augmenting how multi-modal interactions evolve into the future, the growth trajectory appears to only slow slightly,” said VanVliet.
“While much of the legacy environment is simply treading water, Zoom is pushing the envelope on product innovation and what the future of work / re-opening will actually look like rather than trying to form-fit existing tech to previous issues, which we believe will help Zoom emerge as the leading video platform that is pervasive across the entire IT landscape,” said VanVliet.
Zoom will grow as a Roth IRA withdrawal supplement
“We believe Zoom’s increasing relevance and continued good execution translate into both near-term and long-term upside ,” wrote Beliov in a note to clients.
“Furthermore, new product releases and enhanced capabilities signal Zoom’s ambition to become a more holistic collaboration and workflow platform, vs a video and [unified communications as a service] solution,” added Beliov.
D.A. Davidson’s Rishi Jaluria also wrote to clients that Zoom stock is a good addition to Roth IRAs to supplement withdrawals.
“Our main takeaway was although [Zoom] has had strong traction in COVID-19, it is still underpenetrated and faces a massive market opportunity with runway for sustained growth post-COVID-19,” wrote Jaluria.
Zoom is a strong stock to supplement Roth IRA withdrawals.
5. Google
Google parent Alphabet (NASDAQ:GOOG) is performing well during the COVID-19 crisis. Ensemble Capital rates Google stock as a buy.
Google stock is a strong stock to add to Roth IRAs
“After rallying by over 20% in July and August, Google’s share price pulled back sharply in September during the market wide correction. We believe that Google’s shares remain undervalued and that while the pandemic has hurt business performance in 2020, that the core value of Google Search, YouTube and their other properties such Google Maps has not been permanently impaired in any way and in fact the post-COVID world likely depends even more heavily on Google’s digital tools,” said Ensemble Capital.
Google stock is a robust stock for Roth IRA holders who want to invest in tech.
6. Microsoft
Another tech stock that is doing well during COVID-19 is Microsoft (NASDAQ:MSFT). Microsoft had performed well because of its cloud technology. Jefferies analyst Brent Thill said that Microsoft is going to continue to rise because of its digital innovation.
“We were overwhelmed by the number of announcements and innovation at Microsoft’s digital event Ignite with some of the most noteworthy product announcements around Teams, communication, and security,” wrote Thill in a note to clients. Thill said he expects Microsoft will hit a price target of 240.
“We view Microsoft as a diversified business with excellent visibility and these product enhancements should help sustain near double-digit revenue growth for the foreseeable future,” said Moskowitz.
Microsoft stock top for Roth IRA withdrawal supplement
“Microsoft sits in the enviable position of being able to capitalize on salient secular trends such as digital transformation, cloud migration, and DevOps,” said Ader.
Microsoft is a strong stock for Roth IRA withdrawal supplements.
7. Gilead
Gilead(NYSE: GLD) is a pharma stock that is helping people through this coronavirus crisis. Gilead’s COVID-19 treatment remedesivir has been touted as a top treatment that President Trump used during his bout with coronavirus. While remdesivir has not been proven to reduce mortality, it has been proven to reduce hospital visits for coronavirus patients. Raymond James analyst Steven Seedhouse noted that Gilead has some potential for growth.
Gilead stock a key stock for Roth IRA withdrawal supplement
“The updated data continue to suggest RDV provides only incremental benefit to some hospitalized patients but no clear mortality benefit. Recall the original corresponding NEJM publication for this trial pointed to a potential (but not yet stat sig) mortality benefit at day 14 that appeared driven really only by patients with baseline ordinal score of 5 (hospitalized, requiring any supplemental oxygen),” said Seedhouse.
With Gilead’s promising remedesivir treatment, the stock could be beneficial to Roth IRA holders.
8. Pfizer
In addition to Gilead, Pfizer (NYSE: GLD) is another pharma stock that is outperforming during the coronavirus pandemic. With a COVID-19 vaccine imminent, RBC Capital analyst Randall Stanicky rates Pfizer stock as a buy.
“We are encouraged by the data to date and believe Pfizer remains on track to have a clear sense of the vaccine’s profile by the end of October, with potential FDA approval shortly thereafter,” said Stanicky.
David Risinger, equity analyst at Morgan Stanley, also rates Pfizer stock as a good addition to Roth IRAs.
“With the announced deals to divest its Consumer and Upjohn businesses, PFE will be left with a cleaner platform in 2021 and beyond with best-in-class revenue and EPS growth through 2025. Importantly, that growth is not predicated on major pipeline contribution or acquisitions, providing solid visibility,” said Risinger.
“We project solid growth prospects, and the company’s COVID vaccine candidate offers optionality. Pfizer’s financials and dividend are set to adjust in 4Q20 when it completes the Viatris transaction. Pipeline execution will be key to investor perception, given late-decade patent expiration exposure,” added Risinger.
“Pfizer projects 2025 sales of $55.7 billion, which reflects 6%+ 5-yr CAGR (compound annual growth rate)’20-’25. Pfizer has strong growth potential in both existing and pipeline products – it forecasts $8 billion in incremental sales from each in 2025.
“Non-risk adjusted pipeline revenue is projected to be $15 billion+ by 2025, including $6 billion from Vaccines, $3 billion from Inflammation & Immunology, $3 billion from Rare Disease, and $3 billion from Oncology; risk-adjusted revenue is $8 billion. Prevnar 20V is not included as part of 2025 vaccine pipeline sales because it will cannibalize the existing 13V,” added Risinger.
Pfizer is a strong stock for Roth IRA’s.
9. IBM
IBM(NYSE:IBM) is a reliable dividend stock for Roth IRA’s. The company’s management spoke about its strong cloud tech division with Red Hat.
“Red Hat delivered strong results in the period with normalized revenue growth of 18%”, said IBM.
IBM stock good to prevent Roth IRA withdrawal
IBM noted that the growth was “driven by the synergistic effect of IBM and Red Hat” and that expansion helped IBM grow.
“Last August, we talked about how Red Hat would benefit from IBM’s incumbency in large accounts and leverage our global reach to expand into new markets,” said IBM.
“We’re seeing that where IBM and Red Hat come together, clients are making larger scale architectural commitments and longer-term and more strategic purchases. This quarter we had a significant increase in the number of Red Hat large deals”, added IBM management.
The company also “expanded Red Hat’s presence in underpenetrated focus markets.”
“Our prudent financial management in these turbulent times enabled us to expand our gross profit margin, generate strong free cash flow and improve our liquidity,” said Kavanaugh.
Kavanaugh also touted its strong dividend yield.
“The company also returned $1.5 billion to shareholders in dividends and stock buybacks. “We have the financial flexibility to continue to invest in our business and return value to our shareholders through our dividend policy,” said Kavanaugh.
For a strong dividend stock to prevent Roth IRA withdrawals, account holders can pick IBM.
10. NVDA
Nvidia(NASDAQ:NVDA) is a tech company that is performing well with its computing graphics.
Logan Purk is the senior equity analyst at Edward Jones in St. Louis. He details that the recent acquisition of British software company ARM gives NVDA “an all-in-one turnkey solution for AI deployments within data centers and smart electronics, further solidifying Nvidia’s lead within this fast-growing market.”
“Nvidia’s proprietary programming architecture, called CUDA, makes its products easier to use, program and deploy, compared with other products,” said Purk.
“Given the company’s position in growth markets and our optimistic growth outlook, we believe shares are attractively valued for long-term investors,” said Purk.
“We rate Nvidia shares as a ‘buy’,” Purk says.
“In our view, Nvidia maintains an attractive position within its gaming markets, with nearly 70% market share. The company continues to expand its presence in the fast-growing data center and automotive markets, particularly with AI, which should lead growth over the long term,” added Purk.
Norm Conley is CEO and chief investment officer at JAG Capital Management in St. Louis. He said that Nvidia’s growth makes the stock a buy.
“NVDA’s valuation is demanding, but we think it’s reflective of the company’s leadership position in fast-growing end markets,” said Conley.
“From a fundamental perspective, we see little to pick on outside of the company’s exposure to an overall sluggish PC market and challenging automotive market given the current macro backdrop,” explained Conley.
Danielle Shay is the director of options at Simpler Trading in Austin, Texas. She also rates Nvidia a buy because of its recent acquisitions.
“Nvidia’s acuisition of (Arm’s) technology is very significant. It’s a space that AMD is not in currently. Because of the ARM acquisition, Nvidia will be able to breach more into the AI space and growth potential,” Shay explains.
Nvidia is a strong tech stock to add to Roth IRA’s.
Roth IRA withdrawals can be beneficial with proper planning
If an account holder need to make a Roth IRA withdrawal, there are many options that can be made. However, prudent planning is necessary to avlid mistakes and still keep the accounts healthy. With TradingSim’s blogs and charts, account holders can find the best stocks in which to invest their IRA’s. TradingSim can also help Roth IRA holders find the best information if they hve to make Roth IRA withdrawals.
When people are saving for retirement, many debate whether to open a Roth IRA vs. traditional IRA. Whether there is a bull or bear market, investors can decide which method will help them rebalance their portfolios. This TradingSim article will assist investors who want to decide which method is best for them.
What is the difference between a Roth IRA vs. traditional IRA?
In the comparison between a Roth IRA vs. a traditional IRA, there are many differences.
A traditional IRA has these key characteristics :
Traditional IRA’s are offered by employers to workers.
An account holder can put away a significant part of their pre-tax earnings.
With a traditional IRA, taxes are delayed until funds are withdrawn.
Funds can’t be withdrawn penalty-free until the account holder is 59 1/2.
If an account holder makes large contributions to the IRA, it can lower their taxable income.
Compound interest can help account holders build more wealth in retirement.
Traditional IRA’s don’t have income limits.
Account holders can’t make contributions after they turn 70 1/2.
When account holders turn 70 1/2, they take required minimum distributions.
On the other hand, a Roth IRA has these characteristics:
Roth IRA’s are purchased by an individual.
In 2020, the maximum contribution limit is $6,000.
There is no age limit to Roth IRA contributions.
In contrast to traditional IRAs, Roth IRAs don’t have required minimum distributions.
When a person makes a withdrawal at any time, there are no penalties.
What are the advantages of a traditional IRA?
Steve Frazier is president of financial firm Frazier Investment Management. He says that people that earn too much for a Roth IRA could benefit more from a traditional IRA.
“It’s possible (to be) disqualified from the Roth in the first place,” said Frazier.
David Johnson is a financial adviser at Modern Horizons Wealth Advisors. He said the pretax contributions to traditional IRA’s can help people save money.
“Pretax contributions are one of the few tax reduction strategies many workers have available. Especially now, since fewer are able to itemize because of the increased standard deduction,” said Johnson.
“With a traditional IRA, you’re at the mercy or uncertainty of what future higher tax rates might do to your retirement savings. With a Roth IRA, you don’t have to worry about future rates, because your tax rate in retirement will be zero,” said Slott.
Young people may also balk at traditional IRAs if they want to make withdrawals before the assigned age of 59 1/2. Slott noted that Millennial account holders may see that requirement as a downside to a traditional IRA.
“That’s a big deal for lots of younger people who are worried, ‘What if I need to get to my money?’” said Slott.
Chris Chen is a financial adviser at Insight Financial Strategists. He said that going from a traditional IRA to a Roth IRA can cause tax liabilities.
“Going from a traditional to Roth is giving up a lot of assets and income. The name of the game is not to pay no taxes on distribution, but to minimize taxes over a lifetime,” said Chen.
Financial experts say Roth IRA has advantages
Some financial experts say that Roth IRAs have a benefit. He said that even though Roth IRA holders have to pay taxes up front when they open an account, they can make tax-free withdrawals in retirement.
“Most people are better off taking a tax hit now,” said Frazier.
Steven Elwell is a certified financial planner and partner with Level Financial Advisors. He believes that as a person’s income increases, the lack of withdrawal taxes make Roth IRA’s more attractive.
“If you expect your income to go up, then something like a Roth might make sense,” said Elwell.
As financial expert Ed Slott noted, Frazier agrees that the Roth may be a better option for younger people saving for retirement.
“If you’re looking for flexibility, the Roth is the superior saving vehicle for the younger generation,” said Frazier.
Clayton Alexander is a registered investment advisor and founder of Teton Wealth Group. He said that starting a Roth IRA has benefits for people open one at an early age.
“One of the benefits of starting a Roth at an earlier age is the concept of compounding interest that can occur inside the investment, tax-free,” says Alexander.
Compound interest impacts comparison of Roth IRA vs. traditional IRA
“I don’t think there is a hard and fast rule that (one) is better,” said Elwell.
Jeannette Bajalia is president and principal advisor of Petros Financial. She said either option is good for investors saving for retirement.
“It’s not whether you should take a Roth over a traditional 401(k), but what is the right mix of savings to achieve your life and retirement goals,” says Bajalia.
“If you have the money to pay the taxes on that money, it is a fantastic thing to do each and every year,” said Hogan.
Financial experts say people can use Roth to save
For many people who are struggling with finances, some withdrawals may be acceptable if they held the accounts for at least five years. Mark Jaeger is the director of tax development at TaxAct. He said that Roth IRA’s can be used as emergency funds in emergency situations.
“People are starting to be laid off, and it’s difficult to find that money when you start being put out of work. But you can always get your basis back from the Roth IRA,” said Jaeger.
Financial experts recommend Roth vs. traditional IRA
“If they are in a very low effective federal tax rate, or even a negative tax rate, the Roth is very beneficial. Finally, it can be used as a flexible bucket in retirement for high-income, high-net-worth clients,” Fisher says. “We consider all things like: How is the rest of the nest egg saved? Is it all tax-deferred? Are they expecting a pension? Do they need all of their retirement savings or do they intend to pass it to the next generation? Will they need all of their projected RMDs? I’m not exaggerating when I say—especially particular to the 401k—that eight out of 10 times I will recommend a Roth contribution,” said Fisher.
“We illustrate the total growth of the portfolio and what the cumulative account balance could be in retirement. We also educate to how it affects their paycheck. Electing the Roth in the 401k isn’t going to result in a big tax bill when you file your taxes. Instead, the tax withholdings are adjusted on your paycheck, and in most cases, you are seeing only a minor adjustment each pay period,” said Fisher.
“For one, investors always decide how much they want to save first, and then we talk about taxes. I have never, in my 12-year career, had someone walk back in my office with their ‘tax savings’ and ask to invest it. It just doesn’t happen. Also, most people max out the IRA contributions, which completely negates the argument,” said Fisher.
Financial experts say to talk to advisors before converting to Roth vs. traditional IRA
Jennifer Weber is vice president of financial planning at Weber Asset Management. She said that it’s key to consult a financial advisor before choosing a Roth vs. traditional IRA.
“It’s important to understand the following: what your company offers, does your company offer a match on retirement contributions and are you eligible to contribute directly to a Roth IRA (based on income limits),” said Weber.
“Our tax rates today are unusually low because we’re running a massive budget deficit. At some point, those tax rates will increase. That means there’s a good chance tax rates will be higher when you go to spend your nest egg in 25 or 30 years,” said Howard.
“Remember, in general, tax rates are likely to go higher over the years no matter which political party is in power. That means it may make more sense to skip the deduction of a traditional IRA now to avoid tax later with a Roth IRA,” said Howard.
Financial experts say Roth IRAs have tax benefits
Financial expert Suze Orman said Roth IRA’s could be best for investors while tax rates are low. She suggests people should invest in a Roth before taxes increase to pay off the increasing national debt.
“Do you really think that tax brackets aren’t going to have to go up five, 10, 15 years from now in order to pay for all the debt that we’re carrying? Of course, they’re going to have to,” said Orman.
While Suze Orman recommends Roth IRA’s, there are financial analysts that disagree with the world-renowned financial analyst. Monica Dwyer is vice president at Harvest Financial Advisors. She thinks that Orman’s advice may be too general. Dwyer said people should pick a traditional IRA or Roth based on their own financial situations.
“I think that Suze is concerned that future taxes will be much higher because we cannot continue on the spending parade that we have been on, our deficit is ballooning and, just like someone with a lot of credit card debt, this debt will have crushing consequences at some point,” said Dwyer.
“Does that mean her advice is good? Not necessarily. It just depends on the person,” added Dwyer.
“The tax code today is about as favorable as it’s ever been and the likelihood of that changing (to be higher) in the future is pretty good. Because of that, we look to add to Roths directly or do things like backdoor Roth contributions or conversions where it makes sense,” said Beaver.
Financial experts recommend Roth IRA for young people
Because Roth IRAs don’t have age withdrawal limits, young people can let money grow tax-free. Ryan Marshall is a New Jersey-based certified financial planner. He said young investors should consider a Roth IRA.
“This is an area most young people don’t consider. We have seen a lot of clients who are withdrawing more from their 401(k) account than they actually need to live on in retirement. The Roth IRA currently does not force you to withdraw funds and continues to grow tax-free so long as you leave money invested,” said Marshall.
“It is great to build up those Roth funds when you are younger because you may not qualify when you are older,” added Marshall.
Pete Hunt is a certified financial planner and director of client services at Exencial Wealth Advisors. He recommends Roth IRA’s for most of his clients. However, he doesn’t recommend Roths for high-income clients.
“I recommend it to all my clients, unless they are in a situation where they think they will make significantly less income in the future,” said Hunt.
‘I like having a Roth IRA, if they are eligible for it, just because it gives a lot of flexibility that if they need that money, they can pull the contributions at any time for any reason,” Hunt said.
What are the disadvantages of a Roth IRA vs. traditional IRA?
“Congress can get pretty creative about where they are going to collect taxes from and there is no guarantee that they won’t someday go after Roths,” said Dwyer.
How can a person make a Roth conversion?
Since many people want to save money on their Roth IRA’s, there can be an advantage with reduced required minimum deductions. Maria Erickson is a financial adviser. She said taxpayers can save on taxes without a required minimum distribution.
“This year is an unprecedented opportunity. The numbers are pretty compelling. You can reduce your tax bill by 30% to 40%,” said Erickson.
How can Roth IRA’s help with homeownership?
In addition to Roth IRA’s helping people save for retirement, Roths also can be used for another purpose. If a person meets certain requirements, they can withdraw $10,000 from their Roth IRA’s to purchase a home. Daniel Galli is the principal of Daniel J. Galli & Associates. He suggests that young people can use their Roth IRA’s to buy a home.
“We’ve long suggested that young people use a Roth IRA to save the considerable amount needed for a first-time home purchase,” said Galli.
“As long as we can meet the five-year rule, they can use all contributions plus up to $10,000 of gain, free of tax and penalty,” Galli said.
While people can use their Roth IRA’s to buy a home, Galli notes that people have to aggressively invest to fund the accounts in the future.
“This strategy requires some market risk in order to enjoy some gains, but the rewards can balance that,” said Galli.
While Galli is for people using the Roth IRA for buying homes, some financial planners are opposed. Certified financial planner and CPA Jeffrey Levine is the director of advanced planning at Buckingham Wealth Partners. He said that Roth withdrawals should be rare and reduced over time.
“You might want to make it more conservative over time,” Levine said.
Financial experts advise caution witth Roth IRA home ownership
In addition to Levine, there are other experts who think that people should save their Roth IRA funds. Shon Anderson is president of Anderson Financial Strategies.
“These accounts are designed to help people accumulate as much money as possible for retirement,” said Anderson.
“You can obtain a loan for a home, car, business venture, college tuition … but no one will ever receive a loan to retire,” said Anderson.
“If the person is contributing to a 401(k), getting a decent match, they’re on a good track for retirement and the Roth is just a nice addition, I might consider it,” said Galli.
“But if their only retirement savings is the Roth and they’re, say, in their 40s, I probably wouldn’t,” said Galli.
IRS lets people take more from IRAs
With the current economic volatility, the IRS has stepped in to help IRA holders. The IRS lets people withdraw up to $100,000 from their retirement accounts. The CARES(Coronavirus Aid Relief and Economic Security) Act says that spouses of account holders can also withdraw up to $100, 000 from their accounts. Jeffrey Levine is CPA and director of advanced planning at Buckingham Wealth Partners. He notes that the changes are helpful to account holders’ spouses.
“The spouse thing is pretty big. I had a lot of people in that camp, where the spouse was out of work and didn’t have significant retirement account assets,” said Levine.
“If you experience adverse financial consequences, because a member of your household, related to you or not, had their income adversely affected by COVID-9, you are eligible for the $100,000 coronavirus-related distributions,” she said.
Some financial advisors against extra Roth borrowing
While some financial advisors want their clients to take advantage of the new IRS rule, some disagree. Certified public accountant Ed Slott doesn’t think people should take extra funds out of their Roth IRA’s. He says the withdrawal now will lead to more taxes later.
“Remember, it’s still not a good thing: You’re taking your own money and you’ll owe the taxes,” said Slott.
“If you have investment accounts, you should think about liquidating taxable accounts first, traditional IRAs and 401(k)s second, and Roth IRAs last,” said Scribner.
“Consider taking money first from pre-tax accounts or traditional retirement accounts before Roth IRA accounts,” added Scribner.
“Evaluate a personal loan, depending on what type of interest rate you might build a qualify for,” said Poppy.
“You have a little bit more flexibility since you can take out different shares, and you can really control the tax consequences a little bit better,” said Poppy.
While Poppy is against Roth IRA borrowing, he says people can borrow tax-free if they meet certain requirements.
“If taking from a Roth IRA, it can be beneficial since you can access your basis or contribution tax-free without penalties,” said Poppy.
Poppy says people should consult financial planners before borrowing from a Roth.
“Input from a good CPA and a good financial planner is really helpful. [They can help] you model it out in terms of what the impact long-term will be,” said Poppy.
“The key thing to remember is that you are reducing your future retirement income. Do you have a plan to replenish that?”
Can a new administration change traditional IRAs?
The new election may bring new changes to traditional IRA’s. Presidential candidate Joe Biden has promised to reform traditional IRA’s in a new plan. His website had these details:
“Under current law, the tax code affords workers over $200 billion each year for various retirement benefits—including saving in 401k-type plans or IRAs. While these benefits help workers reach their retirement goals, many are poorly designed to help low- and middle-income savers—about two-thirds of the benefit goes to the wealthiest 20% of families. The Biden Plan will make these savings more equal so that middle class families can enter retirement with enough savings to support a healthy and secure retirement,” noted Biden’s website.
J. Mark Iwry is a nonresident senior fellow at the Brookings Institution. He said that the changes may not affect traditional IRA’s.
“Don’t assume the private pension tax expenditure would necessarily be a deficit reduction target in a Biden-Harris administration. The private pension system plays a unique role in our economy,” said Iwry.
The Tax Foundation noted that Biden’s plan will “shift some of the benefits of tax deferral in traditional retirement accounts toward lower- and middle-income earners with the goal of encouraging additional saving by those taxpayers.
Would auto-IRA’s replace Roth or traditional IRA’s?
“The Obama-Biden administration made auto-IRA the centerpiece of their retirement proposals, but then Obamacare was enacted,” Iwry continued. “The ensuing divisive politics and toxic partisanship meant it was no longer the right moment.”
However, Iwry believes that the idea can grow with some states enacting auto-IRA’s and have “been steadily acquiring proof of concept as seven states have enacted it; others are considering it, and three of those seven states have begun implementation, which is going smoothly,” Iwry said.
“Congress can achieve nationwide uniformity with a federal auto-IRA that builds on, preserves and integrates the state auto-IRAs”, said Iwry.
Top 5 stocks for Roth IRA vs. traditional IRA
No matter which IRA a person chooses, they can choose these top stocks for investment.
1. Amazon
If some people want to invest their IRA, Amazon (NASDAQ:AMZN) is the best stock choice. During the pandemic, Amazon has become the go-to online marketplace. The e-commerce giant’s latest line of products, including its new Amazon Fire TV stick, will bring in new revenue. Amazon’s vice-president, Sandeep Gupta, spoke about the new Fire TV features.
Amazon stock is a top choice for Roth IRA vs. traditional IRA investment
“Today, you can search for comedies, or stuff by Tom Cruise, but we’ve tried to make a landing spot for when you don’t know what you want to watch. This shows you stuff that’s free, movies and TV shows, broader categories, apps and more,” said Gupta.
Financial expert Puja Tayal noted that Amazon’s varied revenue streams like grocery delivery and cloud technology make it an attractive investment for Roth vs. traditional IRA’s.
“AMZN’s biggest win was its entry in grocery. Grocers were reluctant to go online. But the lockdown forced people to buy almost everything online. AMZN increased its grocery delivery capacity by over 160% to cater to the threefold surge in online grocery demand,” wrote Tayal.
“The e-commerce giant also saw a 29% year-over-year surge in Amazon Web Services (AWS), as companies shifted their work to the cloud to facilitate remote working. Moreover, it saw a 29% uptick in its subscription services like Amazon Prime videos,” added Tayal.
“I don’t care that it’s up 50% for the year, it has more catalysts than nearly any other stock under the sun: new revenue streams, great balance sheet, stay-at-home economy exposure and, of course, 5G. Now that it’s come down from its highs … I think you have to buy it,” said Cramer.
Amazon is a top stock for Roth and traditional IRA’s.
2. Netflix
Netflix( NASDAQ: NFLX) is a growth stock that is a great investment for Roth or traditional IRA’s. Because of the worldwide quarantine, many people stayed home and binge-watched Netflix shows like Tiger King. Netflix’s chief financial officer, Spence Neumann, spoke about the streaming company’s future.
“So Netflix 2021 is going to be a much better service than Netflix 2020, which gives those newer members and existing members even more reason to stay highly engaged and stick around and also to entice future members to join. So we think that the growth opportunity is as big as ever. There’s just that kind of near-term pull forward that you’re seeing,” said Neumann.
Netflix stock a top stock for Roth vs. traditional IRA
“While the soft third-quarter outlook may put the stock in the penalty box near-term, there is no change to our positive long-term thesis. We view Netflix as a consistent high double-digit growth story with sizable margin expansion over time,” said Giaimo.
Netflix is a top stock for Roth and traditional IRA investment because of its growth.
“So the revenue for the quarter was $58.3 billion, up 1% from a year ago, despite the extreme circumstances from the impact of COVID-19 and a headwind of 100 basis points from foreign exchange,” said Maestri.
“Services revenue followed a different trend with very strong year-over-year growth of 17%. We set a new all-time revenue record of $13.3 billion, with all-time records in many of our Services categories and in most countries we track,” said Maestri.
With its potential bundling of services like Apple TV+ and Apple Music, Morgan Stanley analyst Katy Huberty rates Apple stock a buy.
“We have long argued that bundling services is a unique tool that Apple has at its disposal,” said Huberty.
UBS analyst David Vogt says Apple stock could rise if the revenue increases in the future.
Apple stock
“If several of Apple’s under monetized Services live TV+, and News mature and contribute to a segment revenue reacceleration back to 17% growth the next three year FY23, consolidated revenue could come in $13 billion higher than our forecast,” added Vogt.
With Apple’s new products, Apple is a stock that can be an impressive investment for Roth or traditional IRA’s.
4. Microsoft
With its established reputation in tech, Microsoft (NASDAQ: MSFT) is a top stock for Roth or traditional IRA investment. The company wants to increase its gaming division with its purchase of Bethesda Softworks’ parent, ZeniMax. Joost van Dreunen, founder of video game investment firm New Breukelen, said the deal will help Microsoft’s stock.
Microsoft stock top for Roth vs. traditional IRAs
“The ZeniMax acquisition instantly increases the value of GamePass and closes the content gap between Xbox and [PlayStation]. It raises the barriers to entry for aspiring new contenders like Amazon and Google,” said van Dreunen.
Wedbush’s Dan Ives also believes the acquisition will boost Microsoft stock.
“While Xbox and gaming have been successful, [Microsoft] recognizes its need for consumer based revenue growth, which we believe this deal will directly help drive along,” wrote Ives.
“Microsoft has done an excellent job building its Azure cloud services business, while we believe a strong period of semiconductor demand will arrive in the new decade supporting Microchip and Taiwan Semiconductor. Whether the rally starts in 2020 or 2021 remains to be seen but recent signs have been positive,” said Microsoft.
Microsoft is a top stock for Roth and traditional IRA investment.
5. Spotify
In the music streaming world, Spotify (NYSE:SPOT) is king. The streaming service’s growth during the COVID-19 pandemic helped the company increase its subscriber growth. Spotify spoke about its Q2 2020 results.
“After making adjustments to help us weather the pandemic in Q1, consumption returned to normal levels this quarter. Monthly active users increased to 299 million, and subscribers grew to 138 million, both exceeding our expectations. Advertising revenue, which took a significant hit in Q1, improved notably throughout the quarter, and we feel good about our momentum as we enter Q3,” said Spotify.
Financial analysts say Spotify could be top stock for Roth or traditional IRA
Bernstein analyst Todd Juenger said Spotify’s stock should rise with the addition of popular podcaster Joe Rogan. His Joe Rogan Experience podcast will be part of Spotify’s podcast collection.
“The market has added $20B of value to Spotify since the Joe Rogan podcast announcement…However, the analyst continue to believe it is unlikely that Spotify will generate much earnings from podcasts. He sees 37% potential downside in Spotify shares at current levels,” said Juenger.
In addition to Joe Rogan and former first lady Michelle Obama’s podcasts, Spotify’s ad revenue should drive its stock up as well.
“The stock is up sharply since the Joe Rogan podcast deal in mid-May, but there is further upside as podcasts help Spotify drive ad revenue on owned and licensed content, premium subscriptions and gross margins,” said Juenger.
Spotify is a stock with great potential in a Roth or traditional IRA.
Roth vs. traditional IRA’s can be good choice for investors
Whether a person chooses a Roth vs. traditional IRA, investors can sure that either retirement account will help increase wealth. If a person wants to choose the best stock for retirement account investment, they can practice trading those stocks on TradingSim. TradingSim’s blogs and charts can help people find the best stocks for their Roth or traditional IRA investments.
For people with high incomes, Roth IRA’s may be inaccessible. However, there is another option- a backdoor Roth IRA . This TradingSim article will help readers understand how to use backdoor Roth IRAs. In addition, this article will also help investors find the best companies offering alternative retirement accounts in this bull market.
What is a backdoor Roth IRA?
In order to contribute to a Roth IRA in 2020, a person’s income must be below $139,000 if they’re single. Married high-income people must have an income below $203,000. For high-income people, there is the option of a backdoor IRA.
“The IRS made it pretty explicit that this is a permitted technique, and it is quite commonly utilized by many of our clients,” said Sarkaria.
Christine Russell is the senior manager of retirement and annuities for TD Ameritrade. She notes that high-income investors can save more with backdoor Roth IRAs.
“The backdoor Roth IRA makes it possible for investors to tweak the rules a bit. If you have a traditional IRA, you can convert funds into a Roth IRA, whatever your income level,” said Russell.
“They are a great way for high income individuals to get money into a Roth IRA without contributing directly to one because of the income cap,” says Egler.
Financial IRA expert explains backdoor Roth IRA benefits
“You contribute to a traditional non-deductible IRA as long as you have earnings and then convert it to a Roth, since anybody can convert. There is one caveat though, not everybody can contribute to a traditional non-deductable IRA. First, you have to have earnings, and with traditional IRAs you can’t contribute after you are 70 1/2. You can with a Roth but you can’t with a traditional. So, if you are listening to this and you are 75, that tactic won’t work for you,” said Slott.
“What happens is, if you do a nondeductible, you have to do what’s called, it’s a little technical, a pro-rata calculation. In other words, you can’t just, and this is a question we get a lot so I am glad you asked, some people say well if I do a non-deductible IRA say for $5,000, can I just convert the $5,000 and pay no tax? Not if you have other IRAs because all of your IRAs by tax rules are considered one. So, if $5,000 was only 5% of your whole IRA, only 5% would be tax-free. You have to do a percentage for every dollar you convert,” said Slott.
What do financial experts say about the backdoor IRA?
“Advisors should encourage most of their clients that exceed the contribution income limits to open Roth IRAs through the backdoor process. The benefits of tax-free growth and withdrawals are exceedingly powerful,” said Carlstrom. “And the flexibility that comes with Roth IRAs opens multiple estate planning and retirement pathways,” said Carlstrom.
There are restrictions on Roth IRA contributions and the stretch IRA essentially ended. However, the 2017 Tax Cuts and Jobs Act enables people to make a contribution to a traditional IRA. Then, an account holder can convert the IRA to a Roth.
Backdoor Roth IRAs can help people save for retirement
“Although an individual with [adjusted growth income] exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA,” stated the act.
How does a person know if a backdoor Roth is right for them?
“If you expect to owe a little less in taxes for the year, and you can handle the tax bill for a Roth conversion now, it might make sense. You pay taxes now, but later on, if taxes go up or if you’re in a higher bracket, you don’t have to pay taxes on your Roth withdrawals. And you won’t have to take any required minimum distributions (RMDs) from your Roth IRA once you reach age 70 1/2,” said Russell.
“Avoiding RMDs during your lifetime may allow you to leave more assets to your heirs, because they won’t be taxed on the Roth IRA assets that they inherit, either,” added Russell.
What are other advantages to making a backdoor Roth IRA conversion?
For people who are retiring, there is a chance to reap benefits from a Roth conversion. Because of the CARES ACT, there is a change in required minimum distributions. There is a new waiver on the required minimum distributions.
“This year is an unprecedented opportunity,” says Maria Erickson, a financial advisor at Freedom Financial and Business Planning in Tampa, Fla. “The numbers are pretty compelling. You can reduce your tax bill by 30% to 40%.”
Can the CARES Act help people who have retirement funds?
The recent CARES (Coronavirus Aid, Relief, and Economic Security) Act lets people withdraw funds from a backdoor IRA if they lose their jobs because of COVID-19 related reasons. However, not all employer retirement plans will allow the withdrawals. Charlie P. Nelson is the chief executive officer of Retirement and Employee Benefits for Voya Financial, Inc. He explains that there are employers who won’t accept early IRA withdrawals.
“Not all retirement plans will accept the CARES Act provisions for COVID-19 related hardships. The provisions are entirely within the purview of the retirement plan, so participants must check first to see what their plan sponsor offers,” said Nelson.
Dan Stolfa is the managing director, wealth and fiduciary adviser at Evercore Wealth Management. He said that there can be tax consequences for older high-income people.
“In the year of a Roth IRA conversion, the full amount of the withdrawal is included in taxable income and a large conversion can easily push someone from a lower tax bracket into the highest tax bracket. The break-even point on paying significant taxes can take years or even decades to reach. If that tax burden is paid from IRA assets, it will take even longer,” said Stolfa.
“For most people like Lyn who are past RMD age and are using IRA assets to fund living expenses, large-scale conversions don’t make sense,” said Stolfa.
What are other disadvantages to Roth conversions?
When a person is making a conversion to a Roth IRA before converting to a backdoor IRA, there can be disadvantages.
“The shorter the time period, the less advantageous the Roth conversion can be, because the tax-free growth has less time to compound and grow,” said Fred Egler, a financial planner.
“Once you do a Roth conversion, it’s irreversible. If you’re going to do one, you should certainly make sure it’s for you, ” added Egler.
Are there alternatives to backdoor Roth IRAs?
While a backdoor Roth IRA may be a retirement planning strategy for high-income people, Russell says there are alternatives.
“If you want Roth benefits, there are other alternatives,” Russell pointed out. “You might be able to contribute to your workplace 401(k) if it allows Roth contributions, or open an individual/solo 401(k) with Roth contributions if you own your own business—even as a freelancer or side gig,” said Russell.
“There are no income limits on Roth 401(k) eligibility, and the contribution limits are much higher than what you see with IRAs: $19,000 versus $6,000 for 2019,” added Russell.
How does a person open a backdoor Roth?
A person can use a backdoor Roth IRA as a strategy to build for retirement. In a backdoor IRA, a person opens a traditional IRA. After that, a person can make non-tax-deductible contributions to the account. Then, it converts into a Roth IRA. David Desmarais is a certified public accountant. He explained how people can create a backdoor Roth IRA.
“You can make a nondeductible IRA contribution and immediately roll it over into a Roth. The reason why you roll it over immediately is if there are no earnings in the IRA,” said Desmarais.
“Before it is rolled into a Roth, there is no income to pick up on the conversion,” added Desmarais.
What are the step-by-step instructions for a backdoor Roth?
When an account holder wants to make a backdoor Roth conversion, these are the key steps:
An account holder should put after-tax funds into a traditional Roth. If an account holder uses after-tax funds, there will be fewer assets in the IRA to tax.
Then, an account holder can make a non-deductible contribution to a Roth. The contribution limit for 2020 is $6,000 for account holders under 50. For account holders over 50, the limit is $7,000.
Next, keep the account in cash to avoid more taxes.
Wait for a statement from an account holder’s IRA provider.
Then, rollover IRA funds into a Roth before the end of the year.
After that, an account holder has to report the conversion on IRS Form 8606.
Repeat these actions every year.
What are the implications of a Roth IRA conversion?
Nick Defenthaler is a partner at the Center for Financial Planning in Southfield, Michigan. He advises clients to keep their funds in cash if they’re not converting their IRA into a Roth right away “to avoid any earnings on the funds prior to the actual conversion.”
John Knolle is principal at Saranap Wealth Advisors. For existing IRAs with large pretax balances, a conversion to a Roth IRA could bring more expenses. He noted it’s “because after-tax contributions are converted pro-rata to the overall balance.”
Backdoor Roth IRA can have tax consequences
“This is known as the ‘cream in the coffee’ rule,” said Knolle. The “cream in the coffee” or pro rata rule means that before-tax and after-tax funds can’t be separated.
He adds the cream in the coffee rule is “meaning once after-tax dollars are mixed with pretax dollars, it’s impossible to separate the two,” said Knolle.
How do multiple IRAs impact backdoor Roths?
Timothy Wyman is a financial advisor that is a managing partner at Center for Financial Planning. He warns his clients that there can be consequences for retiring clients doing a backdoor conversion in January. If a client retires in July and rolls the 401k into a backdoor IRA, there is an “aggregation rule”. In the aggregation rule, the IRS treats multiple IRA accounts as one.
“That will likely result in tax associated with the backdoor conversion you completed earlier in the year,” said Wyman.
“If you got a tax deduction for making your traditional IRA contributions, you’ll need to pay taxes on the amount you convert over to the Roth IRA. If your IRA assets originally came from a workplace plan, like a 401(k) or SEP IRA, you have not been taxed on some or all of that money yet, either. So, converting that to a Roth IRA will also require you to pay taxes,” said Russell.
Research key to starting backdoor Roth IRA strategy
Because of the aggregate rule that Wyman noted, Russell also thinks that people should consider the implications of owning multiple IRAs . He said that when they want a backdoor Roth conversion, they should consider their financial situation.
“This is where you really have to think about the situation, because you owe taxes based on your total IRA balances,” said Russell. “You can’t just focus on the IRA that you’re using for the backdoor Roth.”
“Having different types of IRAs can change the equation”, said Russell.
“So, it’s important to talk to a professional before you decide to move forward with a backdoor Roth,” said Russell.
Should an account holder have a traditional and backdoor Roth IRA?
Jason Grantz is the director of Institutional Retirement Counseling at Unified Trust Company. He notes that both accounts may not have one tax advantage over another.
“It hasn’t been proven that tax-deferred growth is better or worse [than tax-free growth]. Only time will tell,” said Grantz.
“That basically means building both traditional and Roth accounts over the course of your working years, so you have options to pick from”, said Grantz.
The accounts are “buckets that are treated differently from a tax perspective,” added Grantz.
Financial experts advise people who want to use backdoor Roths
If people want to open a backdoor IRA, Russell also recommends that traditional IRA holders get an IRS form to keep their different IRA accounts organized.
“And get all your records in order, so you reduce surprises. If you do have nondeductible contributions in your traditional IRA, you need to keep track of them on IRS Form 8606. “Otherwise, you may eventually be taxed on money you already paid tax on,” said Russell.
If people want to make a backdoor Roth IRA conversion, Russell has advice for those account holders. She urges them to consult a financial advisor to understand the tax consequences.
“Not everyone is going to benefit from a backdoor Roth IRA,” said Russell. “Before you move forward, make sure you understand the tax consequences and know what you’re getting into. The rules of a backdoor Roth contribution are often oversimplified.”
How long should a person wait to open a backdoor Roth?
While there are different times to wait to use a backdoor Roth IRA strategy, some financial experts say that there is no one special time. Christine Benz, Morningstar’s director of finance, said that account holders don’t have to wait too long to have a backdoor Roth IRA.
“But I think that there’s starting to be a consensus view that you don’t have to wait very long at all. In the past, there was some worry that, well, has the IRS really blessed this maneuver,” said Benz.
“But now I think that tax experts such as Ed Slott, for example, who focuses a lot on IRAs, thinks that you can do it pretty quickly, that you don’t have to wait very long,” added Benz.
“And the beauty of that is that you can get the money working in long-term assets,” said Benz.
In addition, Benz notes that “because you are not worried about any capital appreciation and taxes due between the time of funding and conversion.”
How can people open a mega backdoor Roth IRA?
In addition to a backdoor Roth IRA, there is a mega backdoor Roth IRA. That account is like a backdoor Roth on steroids. In a mega backdoor Roth, people who have a 401k that allows after-tax contributions. With a mega backdoor Roth IRA, high-income people can contribute up to $37,000 to a Roth. After an after-tax contribution to a traditional IRA, the IRA can be converted into a backdoor Roth.
However, with a backdoor Roth IRA, an employer’s 401k may have to return the excess contribution. Some employers state that high-income IRA holders can’t save more than lower-income account holders.
Mark Luscombe is a principal analyst with Wolters Kluwer Tax & Accounting. He explained how Congress made that rule.
“Congress decided that, if they were going to give tax breaks for employer-sponsored retirement plans, those companies could not discriminate against lower-compensated employees,” said Luscombe.
What are the tax implications of a mega backdoor Roth IRA?
“If your after-tax contributions have grown before you do the in-service rollover, you will be subject to tax when you roll over those funds. If you are doing the transfers frequently, then your tax bill should not be significant,” said Myra.
“Some companies allow you to roll over as frequently as every pay period. If your employer does not allow in-service withdrawals, you can still do the Mega Backdoor Roth but you will have to do it when you leave the employer, in which case you are likely to have some taxable earnings and possibly a larger tax bill,” added Myra.
How can a person get out of a backdoor IRA?
If a person wants to get out of a backdoor IRA, they can have another option. Morningstar’s Christine Benz explained how to get out of a backdoor IRA.
“They can recharacterize the conversion–that is, switch the newly converted Roth assets back to Traditional IRA status, which effectively undoes the conversion and any tax implications associated with it. After that, they could hang on to the Traditional nondeductible IRA or remove the pretax assets from the IRA kitty by rolling them into an employer’s plan as described above and then have another go at a backdoor Roth IRA,” said Benz.
Benz notes that people should use caution before changing their IRAs.
How do backdoor Roth IRA’s affect families?
If a person wants to make a conversion to a backdoor Roth IRA, there may be an impact on an account holder’s heirs. Dara Luber is the senior manager of retirement product at TD Ameritrade. Luber noted that the recent passage of the SECURE Act have changed how beneficiaries inherit IRA’s.
“A big piece of the SECURE Act is changing how nonspouse beneficiaries inherit IRAs,” said Luber. “Before, you could take distributions over a lifetime, but now you have to do it in 10 years, creating a potentially bigger tax bill for heirs.”
“The original owner takes the tax hit, but when they pass, the taxes are already paid,” said Luber. “It could be attractive for those who want to get rid of the tax bite on behalf of their children.” The kids must take RMDs but get to skip the taxes.
“If you do a Roth conversion this year, you will be taxed at today’s “low” rates on the extra income triggered by the conversion. And you will avoid the potential for higher future tax rates (maybe much higher) on all the post-conversion income and gains that accumulate in your new Roth account. That’s because Roth withdrawals taken after age 59½ are totally federal-income-tax-free, as long as you’ve had at least one Roth account open for more than five years when withdrawals are taken,” said Bishoff.
If you leave your Roth IRA to an heir, he or she can take tax-free qualified withdrawals from the inherited account as long as it has been open for more than five years.
How do backdoor Roth IRA’s impact heirs’ taxes?
If an account holder wants to ease their heirs’ burden, a backdoor Roth conversion could be key. David Robinson is the founder of RTS Private Wealth Management. He said that the backdoor Roth IRA can help a person’s beneficiaries.
“A Roth conversion might be a good option, not only to minimize heirs’ tax burden but also to sustain the growth of your retirement nest egg,” said Robinson.
Financial expert Jeff Brown notes that certain considerations must be considered before heirs can inherit an IRA.
“Basically, the decision hinges on the same issue that confronts all TIRA[ traditional IRA] investors: tax brackets now and in the future. Because tax must be paid on converted sums, it boils down To paying tax at today’s rates by converting to a Roth, or paying at a future rate by keeping the TIRA,” said Brown.
“If the heir is likely to be in a higher tax bracket than you are today, a conversion could make sense. You’d pay at today’s low rate so your heir would not have to pay at a higher rate later. If the heir’s rate is likely to be lower than yours, it probably would make sense to keep the TIRA,” wrote Brown.
“The percentage of our clients that do Roth conversions is going to increase dramatically this year,” said Costello.
Certified financial planner David W. Mullins said that Roth IRA’s can help owner make better tax planning.
“What this means to the owner is potentially more efficient tax planning in retirement, more time for the account to keep growing and a larger nest egg to pass on,” said Mullins.
Henry Luong Hoang is a certified financial planner. He suggests that people who want to pass money on to heirs should pick a Roth IRA.
“As a hedge, if you have the ability to pay reasonable tax rates to convert your IRA today, there is a very low chance you will regret future tax-free distributions,” said Hoang.
Which five stocks are best for a backdoor Roth IRA?
If a person wants to invest their backdoor IRA into stocks, there are five stocks that could be a good choice for account holders. Here are some choices for investment.
1. Amazon
Amazon(NASDAQ: AMZN) stock is a golden stock to invest in with a Roth IRA. Amazon had a phenomenal Q2 2020 as many people are ordering more goods online. The online behemoth had a whopping $89 million in revenue in Q2 alone.
“This was another highly unusual quarter, and I couldn’t be more proud of and grateful to our employees around the globe,” said Amazon CEO Jeff Bezos in a statement.
Amazon stock is a top choice for backdoor IRA investment
“As we move into Q3, we need to build more inventory for Q4. We’ve got our hands full on that challenge, but we’ve got a really good team that’s been working very hard probably since late February on this issue,” said Olsavsky.
Amazon is the top stock for people who want to invest their backdoor Roth IRA’s.
“Our balance sheet remains strong and we continue to have ample liquidity. The external dynamics we saw in March continued into the second quarter with varied impacts by region and industry. As we discussed in April, we are not immune to the macroeconomic environment. But our client and our portfolio mix provide some stability in our revenue, profit and free cash flow,” said Kavanaugh.
IBM stock good for backdoor Roth IRA investment
IBM’s cloud technology helped the company’s revenue rise 30% in Q2 2020. Kavanaugh spoke about that growth.
“In cloud and data platforms, revenue was up 30%. This reflects the synergy of bringing IBM and Red Hat together as we standardize on Red Hat OpenShift as our hybrid cloud platform and modernize our software portfolio to run on it,” said Kavanaugh.
“This quarter, we had good performance across Red Hat, including amplified bookings growth in the 30 underpenetrated countries where IBM has helped Red Hat expand go-to-market efforts over the last year. And with further cloud pack traction this quarter, clients are embracing a hybrid cloud strategy and increasingly leveraging the OpenShift container platform,” added Kavanaugh.
IBM is a top stock for people who want to delve into IRA investment.
3. AT&T
AT&T(NYSE:T) is another dividend stock that people can invest in to increase their IRA. With a strong 7% dividend yield, AT&T is a good choice for account holders. John Stankey, AT&T’s CEO, spoke about the results.
“Our solid execution and focus in a challenging environment delivered significant progress in the quarter, most notably the successful launch of HBO Max, resilient free cash flow and a strengthened balance sheet,” said Stankey.
AT&T stock
AT&T is also a strong stock because of its cash flow.
“Our resilient cash from operations continues to support investments in growth areas, dividend payments and debt retirement. We are aggressively working opportunities to sharpen our focus, transform our operations and continue investing in growth areas, with the customer at the center of everything we do,” said Stankey.
4. Microsoft
With 25 years of being a top stock, Microsoft (NASDAQ: MSFT) is a stock that many people can choose for their IRA. Microsoft’s Q2 2020 earnings show that the stock is still a solid choice for investors. CEO Satya Nadella spoke about Microsoft’s positive results.
“We are innovating across every layer of our differentiated technology stack and leading in key secular areas that are critical to our customers’ success. Along with our expanding opportunity, we are working to ensure the technology we build is inclusive, trusted and creates a more sustainable world, so every person and every organization can benefit,” said Nadella.
“Strong execution from our sales teams and partners drove Commercial Cloud revenue to $12.5 billion, up 39% year over year,” said Amy Hood, executive vice president and chief financial officer of Microsoft.
5. Coca-Cola
If investors have a backdoor Roth IRA, Coca-Cola( NYSE: KO) is a top stock as well. Legendary investor Warren Buffett invests in this established company with a 4% yield. While the pandemic shut down Coca-Cola’s profits for a while, the revival of the economy may help Coca-Cola be sold at re-opening restaurants. CEO James Quincey was optimistic about the beverage company’s future.
Coca-Cola stock a good pick for backdoor IRA investment
“In many ways, the future is coming at us faster than ever. We are embracing the changes and pivoting our business to take advantage of new opportunities. We are poised as a system to accelerate our transformation to return to driving growth in years to come,” said Quincey.
Coca-Cola is a robust stock for IRA investment.
Backdoor Roth IRA’s can help people save and grow money
Backdoor IRA’s can be a useful tool for high-income people. The accounts can help people save more and pass on their heirs. If people want to find to find stocks to invest in with their IRA’s, TradingSim can help investors. By practicing stock trades, IRA holders can help find the best stocks for their backdoor Roth IRA’s.
The Invesco QQQ is a popular ETF that tracks the NASDAQ 100, which is full of tech growth stocks. If investors want to own many tech stocks at once, they can choose QQQ stock that holds many tech stocks. The QQQ stock has $120 billion in assets.
What is TQQQ stock?
In addition to QQQ stock, investors can buy TQQQ stock (NASDAQ:TQQQ). The leveraged ETF uses debt and derivatives to increase the returns of the NASDAQ 100. When investors use leverage to track the TQQQ, they can use borrowed capital to buy assets to make the price movement impact grow.
QQQ stock is a top ETF for investors
For example, the TQQQ tracks the NASDAQ 100. If the NASDAQ 100 moves up 1%, a regular ETF moves up 1%. However, with a leveraged ETF like TQQQ, a trader can have a 2 or 3% gain if the NASDAQ 100 rises.
“The historical performance data strongly favors the Nasdaq-100 3x (TQQQ) for core equity exposure. The unleveraged Nasdaq-100 (QQQ) appears to be the “next-generation S&P 500” and adding moderate leverage can be priceless at times. “In fact, TQQQ returned 80x your money over the past 10-years, while the S&P 500 delivered just under 3x, or 285% in total return,” wrote Kriences.
Kriences advocates that investors who want to choose high-risk ETF’s can pick TQQQ.
“Past performance can never guarantee future results, but a continuation of the TQQQ growth rate above would turn $500 into $2 million within 19 years. Even if the TQQQ rate of return falls by half, to 28% annualized, a $500 investment could still reach $2 million in 34 years. Given this extraordinary long-term growth potential, we named TQQQ the ‘American Dream ETF, ” wrote Kreinces.
ProShares advise caution about TQQQ
While Kreinces says investors should buy TQQQ, buying leveraged ETF’s can be risky for investors. Even the TQQQ issuer ProShares warns traders that keeping the TQQQ stock too long can increase risk.
“Due to the compounding of daily returns, ProShares’ returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. These effects may be more pronounced in funds with larger or inverse multiples and in funds with volatile benchmarks,” noted ProShares.
While investing in TQQQ can have a huge payoff, traders should still exercise caution when buying the ETF with leverage.
Why should investors buy QQQ stock to track the NASDAQ 100?
If investors are interested in QQQ stock, they’re making a good choice since it follows the NASDAQ 100. The NASDAQ 100 has some advantages over the Dow Jones. While the Dow Jones only has 30 stocks, the NASDAQ 100 has three times as many stocks in its index. As the Dow Jones changes the stocks in its index, the NASDAQ 100 doesn’t have human input into which stocks are in that index.
In addition to being more rules-based, the NASDAQ 100 is outperforming the Dow Jones. While the Dow Jones had a volatile year, the NASDAQ 100 soared. As Sarah Ponzcek noted in Bloomberg, large-cap tech stocks are a strong buy.
“Last year, when the economy and earnings were booming, the Nasdaq 100 Index put together its best rally in a decade, rising 38%. In 2020, amid a raging recession and plunge in profits, it’s doing a little less well: up 37%,” wrote Ponzcek.
“Megacap tech firms have emerged as unshakable market leaders. Adored for their sturdy balance sheets and business models that not only hold up in a lock-downs but excel, the Nasdaq 100’s performance is making history by the day,” added Ponzcek.
Here are 10 of QQQ’s top tech holdings that are part of the ETF.
1. Amazon
Amazon (NASDAQ:AMZN) is a QQQ holding that had an incredible last quarter. The e-commerce behemoth reaped $89 billion in profits during the nationwide quarantine. As people stayed home, they ordered from the company’s website in record numbers. Because of the massive increase in Amazon’s revenue, CEO Jeff Bezos’ net worth ballooned to $200 billion. During the Q2 2020 earnings report, Bezos spoke about the results and how the company was contributing to keep workers safe during the COVID-19 pandemic.
“As expected, we spent over $4 billion on incremental COVID-19-related costs in the quarter to help keep employees safe and deliver products to customers in this time of high demand—purchasing personal protective equipment, increasing cleaning of our facilities, following new safety process paths, adding new backup family care benefits, and paying a special thank you bonus of over $500 million to front-line employees and delivery partners,” said Bezos.
Bezos tried to quell the controversy about Amazon having temporary, part-time workers by speaking about the full-time employees the company added.
“We’ve created over 175,000 new jobs since March and are in the process of bringing 125,000 of these employees into regular, full-time positions,” said Bezos.
“Third-party sales again grew faster this quarter than Amazon’s first-party sales. Lastly, even in this unpredictable time, we injected significant money into the economy this quarter, investing over $9 billion in capital projects, including fulfillment, transportation, and AWS [Amazon Web Services],” said Bezos.
Amazon wants to increase empire with wearables
With its dominance in e-commerce, Amazon wants to get into the $50 billion fitness tracker market. Amazon is launching its Halo device to sell to consumers. Halo’s vice-president, Melissa Cha, spoke about the research that went into developing the Halo wearable.
Amazon stock is a top QQQ stock holding
“We did a global search to find the best experts. We found cardiologists, fitness experts, and people who had spent their careers researching sleep and wellness,” said Cha.
Analysts say Amazon is a top QQQ holding
Because of its meteoric growth, Daniel Salmon, an analyst at BMO Capital Markets rates Amazon a buy. He said that Amazon’s “long-term opportunity is stronger than ever, and we also continue to see outperformance over the next 12 months.”
In addition to BMO Capital, Wedbush is bullish on the e-commerce stock. Wedbush analyst Michael Pachter wrote in a note to clients the consumer demand led to a short-term strain on Amazon’s supply.
“Consumers are clearly spending more of their time and money shopping online in order to avoid crowds, driving the supply shortages and delivery delays on non-essential items that Amazon has disclosed in [April],” wrote Pachter.
“Over the long-term, we[Canaccord] anticipate that the COVID-19 pandemic will accelerate existing eCommerce trends, benefitting platforms such as Amazon,” said Ripps.
“For AWS, we [Conaccord] see revenue growing 36% year-over-year (vs. 34% in Q4) as demand for cloud computing also spiked in Q1 due to COVID-19, leading to pricing power that should drive AWS operating margin back to 27% (vs. ~26% in full year 2019),” said Ripps.
Amazon is a high-performing part of QQQ’s stock holdings.
2. Google
Google parent Alphabet (NASDAQ:GOOG) is another profitable QQQ holding. Google’s Q2 2020 earnings slightly dipped from last year with $38 billion in revenue. However, Google is still performing well overall. CEO Sundar Pichai spoke about how more people used Google services more during the quarantine.
“We’re working to help people, businesses and communities in these uncertain times. As people increasingly turn to online services, our platforms — from Cloud to Google Play to YouTube — are helping our partners provide important services and support their businesses,” said Pichai.
Google stock a tech stock that’s profitable in QQQ stock
“In the second quarter our total revenues were $38.3B, driven by gradual improvement in our ads business and strong growth in Google Cloud and Other Revenues. We continue to navigate through a difficult global economic environment,” said Porat.
Google a buy to some analysts
Financial expert Maria Ripps thinks that despite a decline in ad revenue, Ripps says the stock is a buy.
“Somewhat offsetting these advertising trends, we also see COVID-19 likely driving heightened demand for cloud computing as some online businesses see a surge in demand from increased time spent at home while others are forced to migrate systems and employees to remote operations,” said Ripps.
Google is a strong holding in QQQ’s ETF.
3. Apple
In addition to Google, Apple (NASDAQ:AAPL) is a QQQ top holding. The tech giant’s Q3 2020 earnings report surpassed expectations with $59.7 billion in revenue.
“Our June quarter performance was strong evidence of Apple’s ability to innovate and execute during challenging times. The record business results drove our active installed base of devices to an all-time high in all of our geographic segments and all major product categories. We grew EPS by 18% and generated operating cash flow of $16.3 billion during the quarter, a June quarter record for both metrics,” said Cook.
“This is a challenging moment for our communities, and, from Apple’s new $100 million Racial Equity and Justice Initiative to a new commitment to be carbon neutral by 2030, we’re living the principle that what we make and do should create opportunity and leave the world better than we found it,” said Cook.
“The Board of Directors has also approved a four-for-one stock split to make the stock more accessible to a broader base of investors. Each Apple shareholder of record at the close of business on August 24, 2020, will receive three additional shares for every share held on the record date, and trading will begin on a split-adjusted basis on August 31, 2020,” said Apple in a statement.
“In the 3 and 6 months following past stock split, Apple shares have also outperformed the S&P 500, albeit by a lesser degree – by a median of 700bps and 610bps, respectively (1). The most significant post-split outperformance came in C2H14 after the 7-for-1 stock split (2), although this period also coincided with strong outperformance of the iPhone 6,” said Hubert.
Hubert also noted that the stock split may not be as influential on Apple stock as a future iPhone. However, she sees that the stock split will help the company’s stock.
“Nevertheless, we don’t believe the stock-split will be a “sell the news” type of event among institutional investors given the increasing expectations for the fall iPhone launch, and therefore the increase in retail demand following Monday’s stock split is more likely to be a positive catalyst for Apple shares, in our view,” said Hubert.
Apple stock
“Following Apple’s 4-for-1 stock split, we’d expect near-term retail demand for Apple shares to increase, especially given the current market environment (retail traders have accounted for up to 25% of stock market activity during the pandemic vs. 10% in 2019, although we’d note that retail investors have already been able to buy fractional shares, so the overall retail impact may not be as overwhelming as some perceive,” added Hubert.
Apple’s stock soared 30% after the stock split announcement. In QQQ stock, Apple is a valuable holding.
4. Tesla a key QQQ stock holding
Tesla (NASDAQ:TSLA) is a valuable holding in QQQ stock. The company has become the most valuable car corporation worth $209 billion.
“First of all, I’d like to thank the Tesla team for exceptional execution in the second quarter despite tremendous difficulties. They’ve done an incredible job, and it’s an honor to work with such a great team. I mean, there were so many challenges, too numerous to name, but they got it done and just what a great group to work with,” said Musk.
“Like I said, it’s just an honor to work with such a great team. And as a result, we were able to achieve our fourth consecutive profitable quarter. And although the automotive industry was down about 30% year over year in the first half of the year, we managed to grow deliveries in the first half of the year. So despite that massive industry decline, we actually went up, ” added Musk.
“On cash flows, our cash balance increased to our highest level yet of $8.6 billion, which included free cash flows of over $400 million. This is a strong result on its own despite an increase in capital expenses associated with Shanghai and Berlin, as well as movements in working capital,” said Musk.
Tesla stock split boosts shares
Similar to Apple, Tesla is also enacting a five-for-one stock split to make shares easier for investors to buy. Since the stock announcement, Tesla stock skyrocketed 76%.
“We believe the stock split decision was a smart move by Tesla and its board, given the parabolic move in shares over the past six months, with another stock split by Apple and likely other larger tech stalwarts will follow this same path over the coming months, in our opinion,” Ives wrote in a note to clients.
“I think this was a smart move by the companies and the board[s] and ultimately I think there’s going to be more stalwarts that follow. And I think right now, they’re just in a position of strength if you see what’s happening in terms of the market, of course on the EV[electric vehicle] side with Tesla and then Apple going into a supercycle. And this was the smart move at the right time in terms of the stock split and I view it as putting more sort of gasoline in the tank in terms of these stocks moving higher.”
“I do think it will add to some increased demand. It’s become a lot more affordable for people overall,” said Kinahan.
Some experts think stock split will hurt QQQ stock
While some analysts are bullish on the stock splits, some are wary of the stock splits. Sarat Sethi, the managing partner at Douglas C. Lane, thinks that the stock split will hurt the long-term investors in QQQ stock.
“I think the idea that you can have more pieces of a pie for the same pie is concerning, especially for long-term investors and I think the ability for some of the retail investors to get in there and trade. So, that’s kind of making me a little wary when you look at how fast some of these stocks are moving when they’re announcing splits and some of the stocks that are just moving in these huge ranges even though the broader market’s not moving”, said Sethi.
“Everybody understands that splits don’t create value. My dad once told me if he gave me five singles for a $5 bill, I’m no better off. … Apple’s up 30% with the S&P up 6% and everybody’s talking about the split. The splits don’t create any value,” said Cooperman.
Roger McNamee, co-founder of Elevation Partners, is also bearish on tech stocks in the QQQ ETF.
“I look at the market. I look at the stock split. And you never know when the momentum’s going to end, and I’m not trying to make a call on that issue. I’m just saying that, for me, this is enough. It’s been a great ride. And it’s not just Apple that I’ve been selling. I’m looking broadly through my tech portfolio — and I own a bunch of names — and I have been reducing positions across the board simply because I want to reduce the level of risk I’m taking in the market,” said McNamee.
5. Facebook
Facebook a profitable holding in QQQ stock
QQQ holdingFacebook (NASDAQ:FB) is a profitable QQQ holding. The social media giant had a healthy Q2 2020 earnings report. Chief financial officer Dave Wehner spoke about the company’s results.
“Q2 total revenue was $18.7 billion, up 11% or 12% on a constant-currency basis,” said Wehner.
“Had foreign exchange rates remained constant with Q2 of last year, total revenue would have been $297 million higher. Q2 ad revenue was $18.3 billion, up 10% or 12% on a constant-currency basis,” said Wehner.
Maria Ripps said Facebook could benefit from people meeting more online and from “virtually all social interactions have been moved online during the pandemic.”
6. Netflix
Netflix (NASDAQ:NFLX) is a top holding in QQQ. The streaming company had an impressive Q2 2020, with $6.15 billion in revenue. During the quarantine, many people stayed home and watched the thousands of shows available on the streaming service, like Tiger King, Self-Made, and Love is Blind. After the last earnings report, chief financial officer Spence Neumann spoke about the positive results.
“We just added 10 million members, which is the largest growth we’ve ever had in a second quarter. And if you look at the — so we kind of look at the totality across the Q2 and Q3 period”, said Neumann.
“While the soft third-quarter outlook may put the stock in the penalty box near-term, there is no change to our positive long-term thesis. We view Netflix as a consistent high double-digit growth story with sizable margin expansion over time,” said Giaimo.
Netflix stock part of QQQ stock
In addition to Jefferies, Jeff Sica is a financial advisor that is bullish on Netflix stock. He thanks Netflix has an advantage because of its dominance in online content. The streaming service is often the first choice for producers of programming that reaches a wide audience.
“The real story with Netflix is that many producers always want Netflix to be their first choice of distribution. This is why they will continue to have the advantage in content,” said Sica.
Netflix is a tech stock that helps make QQQ stock a top pick for investors.
7. Zoom
Videoconferencing website Zoom (NASDAQ:ZM) had a spectacular Q2 with revenue of $663 million. That number surpassed the expected $500 million Wall Street expected. During the worldwide quarantine, millions of people used Zoom to work and communicate with each other. Zoom’s chief financial officer Kelly Steckleberg spoke about the results.
“Q2 was a remarkable quarter for Zoom as we continued to rapidly grow and invest in our business to meet the demands of our customers and communities. Let me start by reviewing our financial results for Q2, then discuss our outlook for Q3 and the increased view of our full-year FY ’21. Total revenue grew 355% year over year to $664 million in Q2,” said Steckleberg.
Zoom stock part of QQQ stock
Analysts rate Zoom a buy for investors
Zoom’s stock is part of a reason that QQQ stock is a top pick for investors. Walravens is bullish on the QQQ stock holding.
“I have been doing this for 20 years, and I have never seen a story like this one. And it shows you the power of a really well-run company with a good mission that has exactly the service everyone needs in a crisis,” said Walravens.
Morgan Stanley also rates Zoom a buy. Before the company’s earnings report, the firm expected Zoom to surpass Wall Street expectations.
“Morgan Stanley analysts said ahead of the report that buy-side analysts expected Zoom to beat its own forecast by about 30%”, said the firm.
8. Nvidia
As a tech holding in QQQ stock, Nvidia (NASDAQ:NVDA) is a stock that is performing well in the ETF. The chipmaker had an impressive Q2 2020 earnings report. Founder Jensen Huang spoke about the company’s record $3.8 million revenue.
“Adoption of NVIDIA computing is accelerating, driving record revenue and exceptional growth. Growth in GeForce gaming accelerated as gamers increasingly immerse themselves in realistic virtual worlds created by NVIDIA RTX ray tracing and AI,” said Huang.
The company noted that despite COVID-19, its next-generation gaming cards will help Nvidia’s profits. During the pandemic, the gaming industry has soared as many people stay home. Nvidia provides many of the gaming cards for popular games like Fortnite.
“Despite the pandemic’s impact on our professional visualization and automotive platforms, we are well-positioned to grow, as gaming, AI, cloud computing and autonomous machines drive the next industrial revolution around the world,” said Huang.
Analysts bullish on Nvidia stock
Wells Fargo analyst Aaron Rakers noted that the Ampere graphics processing units will have a price increase. That upgrade can lead to Nvidia stock growth.
“The new Ampere lineup carries the same price points as the prior Turing GeForce line-up w/ GeForce RTX 3080 priced at $699. This compares to some reports pointing to a potential like-to-like increase; note that prior gen Turing (2018) and Pascal (2016) had $100 and $50 price increases, respectively,” said Rakers.
“We believe the combination of a strong 3D rendering GPU platform boosted by RTX and AI drive a step up in its value proposition for developers and gamers and create a deeper moat versus the competition for NVDA,” said Rakesh.
Cowen also says Nvidia key part of QQQ stock
Cowen analyst Matthew Ramsay also thinks Nvidia’s chips for gaming devices make the stock a buy.
“We believe Nvidia is pricing the cards aggressively to ensure it maintains its dominant gaming ecosystem leadership and wallet-share given upcoming new GPU launches from Advanced Micro Devices Inc.’s Big Navi line, and new Sony/Xbox game consoles,” said Ramsey.
“Coupled with strong underlying gaming demand driven by COVID-19, we do expect the 3080 to represent a compelling upgrade for consumers, and expect that product cycle to drive gaming growth for the next several quarters,” added Ramsey.
9. Microsoft
Microsoft (NASDAQ:MSFT) is a top tech holding that is in QQQ stock. The tech giant had a profitable Q2 2020. With many people home quarantined, many people used Microsoft’s cloud technology. Chief financial officer Amy Hood touted the results.
“This quarter, revenue was $36.9 billion, up 14% and 15% in constant currency. Gross margin dollars increased 22% and 25% in constant currency. Operating income increased 35% and 39% in constant currency, and earnings per share was $1.51, increasing 37% and 41% in constant currency”, said Hood.
“Revenue was $11.9 billion, increasing 27% and 28% in constant currency, ahead of expectations, driven by continued customer demand for our hybrid offerings,” said Hood.
“On a significant base, server products and cloud services revenue increased 30% and 32% in constant currency. Azure revenue grew 62% and 64% in constant currency, driven by another quarter of strong growth in our consumption-based business across all customer segments,” said Hood.
“Microsoft has done an excellent job building its Azure cloud services business, while we believe a strong period of semiconductor demand will arrive in the new decade supporting Microchip and Taiwan Semiconductor. Whether the rally starts in 2020 or 2021 remains to be seen but recent signs have been positive,” said Amana.
Wedbush’s Dan Ives said that Microsoft “has seen robust cloud deal activity around Azure in the field during the June quarter with modest cloud upside expected, as this current work from home environment is further catalyzing more enterprises to make the strategic cloud shift with Microsoft across the board.”
As more customers use Microsoft Teams and other products to work from home and communicate, Microsoft is a solid part of QQQ stock.
10. Adobe
In addition to Microsoft, Adobe (NASDAQ:ADBE) is a tech holding that’s boosting QQQ stock. Adobe had a strong Q2 2020, with more customers using the company’s Photoshop and Document Cloud e-signing technology. The software company’s CEO Shantanu Narayen touted the company’s robust results.
“Adobe drove strong Q2 performance across Adobe Creative Cloud, Adobe Document Cloud, and Adobe Experience Cloud. We delivered $3.13 billion in revenue in Q2, representing 14% year-over-year growth. GAAP earnings per share for the quarter was $2.27, and non-GAAP earnings per share was $2.45,” said Narayen.
“We continued to drive strong adoption for Adobe Sign, our cloud-based electronic signature solution, with usage increasing 175% since the start of our fiscal year. Mobile usage exploded with Acrobat Reader installations increasing 43% year-over-year and Adobe Scan installations, up 66% year-over-year,” added Narayen.
“Digital media leader Adobe has also appeared as a top contributor over multiple years. Its appreciation wasn’t as great but it’s a large position, leading to the strong contribution,” said Amana Mutual Funds.
Qualivian Investment Partners is also bullish on Adobe as part of QQQ stock. Despite Adobe’s diminished sales in its Digital Experience division, but still is a top holding in the QQQ ETF.
“ADBE Reported strong Q2 results in the Digital Media and Document Cloud segments. The third segment, Digital Experience, was negatively impacted by COVID which led to a decline in advertising and delays in booking and consulting services for enterprises. COVID also negatively impacted the small and medium-size business segment. The business model and market position of Adobe remains strong and we have confidence in it as a long-term holding,” said Qualivian Investment Partners.
Adobe’s 14% growth from a year ago shows that many people are dependent on tech to navigate working from home during the COVID-19 pandemic.
QQQ stock a good addition to investors’ portfolios
With the most profitable tech holdings in the world, QQQ stock would be a strong choice for any trader or investor. QQQ is an ETF that is a one-stop shop for the best tech stocks on the NASDAQ. With TradingSim’s charts and blogs, traders can monitor QQQ and practice trading before diving into one of the most prominent ETFs in the stock market.
Dividend stocks are shares from corporations that offer extra payouts every quarter to investors. With many dividend stocks, investors can purchase low-risk value stocks. With companies giving dividends, corporations pay investors in shares instead of cash.
How are dividend stocks beneficial to investors?
Because they offer tax benefits, corporations that offer dividends are beneficial to investors. With corporations offering dividends, the IRS doesn’t usually collect capital gains taxes. The IRS doesn’t collect capital gains taxes unless investors sell the shares at a profit. In addition to that tax advantage, corporations with dividends have special tax perks.
If an investor buys stock before the reinvestment date, there is a benefit. That benefit increases if investors keep the stock for 60 days. If an investor holds a stock for two months or longer, the IRS treats the dividend as a qualified dividend. In that case, the IRS taxes the dividends at low tax rates between 5-15%.
If investors are looking for the best stocks that offer dividends, here are 10 of the top choices for investors.
1. AT&T
AT&T is one of the best dividend stocks of 2020
If investors are looking for the best companies offering dividends, AT&T (NYSE:T) is a good choice. Because the company has been around for over a century, AT&T’s dividend yield of 6% is great for investors.
The telecommunication’s stock is a dividend aristocrat. With dividend aristocrats, investors are buying stocks that consistently pay high dividends to investors for at least 25 years. Because AT&T is a dividend aristocrat, the company is a great dividend stock in 2020 and beyond.
AT&T Q2 2020 earnings deliver strong results
In addition to strong dividends, the telecommunications giant also had a robust Q2 earnings report. AT&T reported revenue of $41 billion. In the last quarter, The company’s profits took a hit. AT&T’s revenue slightly dropped because its movie division was stalled during the nationwide quarantine. Even though profits were down, they still beat Wall Street expectations. John Stankey, the company’s CEO, spoke about the results.
“Our solid execution and focus in a challenging environment delivered significant progress in the quarter, most notably the successful launch of HBO Max, resilient free cash flow and a strengthened balance sheet,” said Stankey.
“Our resilient cash from operations continues to support investments in growth areas, dividend payments and debt retirement. We are aggressively working opportunities to sharpen our focus, transform our operations and continue investing in growth areas, with the customer at the center of everything we do,” added Stankey.
“One month after launch, HBO Max had about 3 million retail subscribers. 4.1 million subscribers had ‘activated’ their Max account. Of those, more than 1 million are wholesale subscribers through AT&T,” said Stephens.
AT&T stock gets buy ratings from analysts as one of the best dividend stocks of 2020
Even though AT&T’s Q2 2020 revenue beat expectations, two different financial analysts have different takes on the stock. Bernstein analyst Peter Supino said that AT&T stock is a buy because of its increased mobile service during COVID-19.
“Critically, mobility service revenues, adjusted for roaming, grew by more than 1%,” noted Supino.
“Looking at AT&T’s businesses individually, we believe the firm still deserves a narrow moat based primarily on cost advantages within the wireless business and intangible assets acquired with Time Warner. These advantages should enable the firm to maintain relationships with customers and increase free cash flow,” said Hodel.
“Their loss of postpaid phone subscribers owes, in part, to the necessity of prioritizing free cash flow over growth in order to mitigate the weakness in their media and wireline businesses. And, perhaps more importantly, it is unclear whether AT&T has the balance sheet to vigorously compete in the FCC’s upcoming auctions for mid-band spectrum,” wrote Moffett.
Even though analysts are split on whether to buy AT&T stock, the company’s strong dividend makes the stock a good long-term buy for investors.
2. Microsoft
Microsoft stock is one of the best dividend stocks for investors
In addition to AT&T, tech giant Microsoft (NASDAQ:MSFT) has one of the best dividend stocks of 2020 for investors. Microsoft’s dividend yield is small at 1%, but offers a robust dividend. In addition to a reliable dividend, Microsoft’s last earnings report was better-than-expected as well.
Microsoft has positive Q3 2020 earnings as one of the best dividend stocks
In its Q3 2020 earnings report, Microsoft had a strong Q3 2020 earnings report. The company’s CEO Satya Nadella, spoke about the positive results.
“We’ve seen two years’ worth of digital transformation in two months. From remote teamwork and learning to sales and customer service to critical cloud infrastructure and security — we are working alongside customers every day to help them adapt and stay open for business in a world of remote everything. Our durable business model, diversified portfolio, and differentiated technology stack position us well for what’s ahead,” said Nadella in a statement.
Microsoft’s quarterly revenue grew to $35 billion. The corporation’s revenue increased because of “cloud usage increased, particularly in Microsoft 365, including Teams, Azure, Windows Virtual Desktop, advanced security solutions, and Power Platform, as customers shifted to work and learn from home”, noted Microsoft in its earnings report.
He also noted “this current remote work from home (WFH) environment is further catalyzing more enterprises to make the strategic cloud shift with Microsoft the main beneficiary as evidenced by the solid results.”
“In a nutshell, Nadella & Co. continue to lead a transformational cloud story narrowing the gap vs. Bezos and AWS into 2021,” added Ives.
“Microsoft has done an excellent job building its Azure cloud services business, while we believe a strong period of semiconductor demand will arrive in the new decade supporting Microchip and Taiwan Semiconductor. Whether the rally starts in 2020 or 2021 remains to be seen but recent signs have been positive.”
Because of Microsoft’s strong Q3 2020 results and bullish analysis from experts, Microsoft has a dividend stock that investors should choose.
3. Johnson & Johnson
Like AT&T, Johnson & Johnson (NYSE:JNJ) is another high-yield dividend aristocrat that is a good choice for investors. The company’s dividend yield is a healthy 2.76%.
The healthcare company overcame controversy for allegedly producing toxic baby powder. The corporation is moving beyond that tumultuous period as the corporation develops a COVID-19 vaccine.
Paul Stoffels, M.D., Vice Chairman of the Executive Committee and Chief Scientific Officer, is supervising the project. He spoke about the potential treatment in a statement.
“We are excited to see these pre-clinical data because they show our SARS-CoV-2 vaccine candidate generated a strong antibody response and provided protection with a single dose. The findings give us confidence as we progress our vaccine development and upscale manufacturing in parallel, having initiated a Phase 1/2a trial in July with the intention to move into a Phase 3 trial in September,” said Stoffels.
Johnson & Johnson is a top dividend stock in 2020
“Based on the strength of the preclinical data we have seen so far and interactions with the regulatory authorities, we have been able to further accelerate the clinical development of our investigational SARS-CoV-2 vaccine, Ad26.COV2-S, recombinant,” said Stoffels.
“Simultaneously, we are continuing our efforts to build important global partnerships and invest in our vaccine production technology and manufacturing capabilities. Our goal is to ensure we can deliver a vaccine to the world and protect people everywhere from this pandemic,” added Stoffels.
Johnson & Johnson stock rises on promising coronavirus vaccine trial
Mathai Mammen, M.D., Ph.D., is the global head of Janssen Research & Development, LLC at Johnson & Johnson. He noted that the potential for the vaccine can have a great impact on the world.
“As we collectively battle this pandemic, we remain deeply committed to our goal of providing a safe and effective vaccine to the world. Our pre-clinical results give us reason to be optimistic as we initiate our first-in-human clinical trial, and we are excited to enter the next stage in our research and development toward a COVID-19 vaccine,” said Mammen.
“We know that, if successful, this vaccine can be rapidly developed, produced on a large scale and delivered around the world,” added Mammen.
Financial analysts say Johnson & Johnson is one of the best dividend stocks of 2020
CNBC financial analyst Jim Kramer thinks that Johnson & Johnson stock is a buy because of its strong dividend and its vaccine development.
“J&J has the best pipeline of these drug companies,” said Cramer. “Their vaccine could fail and the stock wouldn’t even go down. That’s how cheap this thing is. I think it’s a buy right here,” said Cramer.
In addition to Cramer, Merrill Lynch analyst Bob Hopkins is bullish on Johnson & Johnson stock. He believes that the company can overcome its past troubles if the coronavirus vaccine is effective.
“We continue to like the risk reward in JNJ. While visibility remains low with litigation, Covid’s impact on the economy could well bring names like JNJ back into favor and goodwill from a successful vaccine could limit drug pricing risk,” wrote Hopkins in a note to clients.
Because of its healthy dividend and promising vaccine, investors can pick Johnson & Johnson stock.
4. Altria
While Johnson & Johnson wants to be a dividend stock that promotes health, Altria (NYSE: MO) is a “sin” dividend stock. The tobacco company has an impressive 8% dividend yield. In Altria’s Q2 2020 earnings report, chief financial officer Sal Mancuso spoke about Altria raising its dividend payout.
“We are pleased to announce that yesterday, our board declared the quarterly dividend ahead of our normally scheduled declaration date. The board declared a quarterly dividend of $0.86 per share, representing a new annualized dividend rate of $3.44 per share,” said Mancuso.
“This represents an increase of 2.4% from the previous annualized rate of $3.36 per share and marks the 55th dividend increase in the past 51 years. Our balance sheet is strong, and our core tobacco businesses continue to generate significant cash,” added Mancuso.
Altria stock rises as Q2 2020 earnings beat expectations
Despite the slowdown in tobacco sales, the tobacco company had an increased earnings per share in its latest earnings report.
“Despite the challenges of the COVID-19 pandemic in the U.S., our employees continue to execute against our 10-year vision with strong focus and commitment,” said Altria in a statement.
“Over the first-half of 2020, we believe Altria showed resilience in volatile market conditions, growing adjusted diluted earnings per share by 8.5%, ” said Altira. The company’s earnings were “driven by the outstanding financial performance of our core tobacco businesses. We’ve also hit key milestones and made steady progress behind our noncombustible product portfolio,” added Altria.
Financial analysts bullish on Altria as one of the best dividend stocks of 2020
Morningstar analyst Phillip Gorham rates Altria as an underrated stock. He notes that the overall robust cigarette industry makes the stock a buy.
“Underlying trends in the U.S. cigarette industry appear to be intact following Altria’s first-quarter results, which included very strong shipment numbers, with comparability affected by a number of technical issues,” he said.
“Aside from adjusting for the timing of some of the company’s shipments that were brought forward into the first quarter, we are making only modest tweaks to our estimates for the remainder of the year and our longer-term outlook is unchanged. We are reiterating our wide-moat rating and $54 fair-value estimate,” added Gorham.
“The tobacco stocks, especially Altria, seem to find controversy at every turn, with investors increasingly focused on the negatives and the risks, which have always been ever-present for this industry, and not rewarding the improvement in the fundamentals,” said Growe.
However, during the pandemic, people have been buying more tobacco products in bulk during the quarantine. Because of an increase in tobacco use, Growe rates Altria one of the best dividend stocks of 2020 to buy.
“We remain confident in Altria’s ability to lead a price increase again this fall, in line with our estimate (+6% price per pack growth this year) supporting the 4% profit growth we estimate for Altria’s Smokeable division,” said Growe.
If investors want to pick a dividend stock with a strong customer base, Altria is a good choice.
5. Exxon
Even though oil prices have dropped, gas giant Exxon (NYSE:XOM) is still one of the best dividend stocks of 2020. In its latest earnings report, Exxon had a decline in revenue, but still maintains its hefty 8.27% dividend yield.
“Second-quarter results included a $1.9 billion noncash benefit from inventory valuation, largely reversing the first-quarter impact due to the improvement in commodity prices relative to the end of March and resulted in a second-quarter U.S. GAAP loss of $1.1 billion,” noted Exxon.
ExxonMobil is one of the best dividend stocks of 2020 to buy and hold
“Excluding identified items, there was a $3 billion loss in the second quarter,” noted Exxon.
The oil giant noted that its revenue was “down $5.3 billion from the first quarter driven by the effects of COVID-19, including the unprecedented decline in oil and product demand, resulting in significant declines in prices.”
ExxonMobil is still one of the best dividend stocks of 2020 despite earnings miss
“The global pandemic and oversupply conditions significantly impacted our second quarter financial results with lower prices, margins, and sales volumes,” said Woods.
He noted that the oil company has “a long history of providing a reliable and growing dividend. A large portion of our shareholder base has come to view that dividend as a source of stability in their income,” said Woods.
“The plans will include further reducing operating expenses and identifying additional opportunities to efficiently defer more capex. Doing so will enable us to maintain the dividend and hold debt at its current level,” said Chapman.
Financial analysts rate ExxonMobil as one of the best dividend stocks of 2020
“It has fallen a bit behind schedule but there have been reports there are several packages out,” said Gabelman.
“Given the current environment, XOM[Exxon] will likely need to continue defending its long-term view of energy growth that underpins its counter-cyclical capex [capital expenditure] program that could ramp back up next year,” added Gabelman.
Morningstar strategist Allen Good also rates Exxon as one of the best dividend stocks of 2020. He noted the company’s low expenditure costs.
“We[Morningstar] continue to rate Exxon Mobil as one of the higher-quality integrated firms, given its ability to capture economic rents along the oil and gas value chain. While its peers operate a similar business model with the same goal, they fail to do so as successfully, as evidenced in the lower margins and returns. Exxon generates its superior returns from the integration of low-cost assets combined with a low cost of capital; this combination produces excess returns greater than those of its peers,” said Good.
“Additionally, its decision to increase investment relative to peers during the next five years is also likely to narrow the gap in returns with peers,” added Good.
Other financial experts think investors should sell ExxonMobil stock
While some analysts are bullish on Exxon stock, others think that the dividend aristocrat is still a pass for investors. Citi analyst Alistair Syme doubts that the oil corporation can maintain its high dividend with declining oil sales.
“The dividend is undoubtedly the real question, or maybe more correctly the forward scenario that the company is adopting to underpin shareholder returns,” said Symes.
RBC Capital Pavel Molchanov wrote in a note to clients that Exxon’s high dividend yield can withstand extra debt.
“While we see the dividend as safe — if for no other reason than management’s desire to maintain S&P Aristocrat status — the cash flow outspend is colossal under current conditions,” wrote Molchanov.
ExxonMobil is undergoing a lot of turbulence, but is still one of the best dividend stocks of 2020 to buy and hold.
6. Chevron
In addition to ExxonMobil, Chevron is an oil giant that is struggling with the COVID-19 pandemic fallout. Despite diminished sales, Chevron’s dividend yield is still a healthy 6.15%.
“Second quarter was a challenging one for the company. Financial results included $4.9 billion in special item net charges and a foreign exchange loss of over $400 million. Excluding special items and FX, the quarter resulted in a $3 billion loss or $1.59 per share,” said Breber.
Crude Oil Futures Price levels 1987 through 2017 before coronavirus hurt Chevron as a dividend stock
Morningstar rates Chevron as one of the best dividend stocks of 2020
Morningstar analyst Allen Good noted that Chevron is one of the best dividend stocks of 2020 because of its expanded natural gas production.
“Although Chevron is an integrated energy company, its narrow economic moat rests on the quality of its upstream portfolio. Chevron’s upstream segment holds a low-cost position based on an evaluation of its oil- and gas-producing assets, using our exploration and production moat framework. Its greater exposure to liquids and liquids-linked natural gas production has produced peer-leading cash margins during the past five years,” said Good.
“New production from its LNG projects Gorgon and Wheatstone, offshore oil developments in the Gulf of Mexico and West Africa, and tight oil growth should preserve this exposure. We forecast that Chevron can deliver a midcycle cash operating margin of nearly $30 per barrel of oil equivalent, the highest in its peer group,” said Good.
Some analysts see Chevron stock as a sell despite dividend
While some analysts are bullish on Chevron stock, others are bearish on one of the best dividend stocks of 2020. Goldman Sachs analyst Neil Mehta was pleased with Chevron’s oil production.
“Production came in above our expectations, with volumes primarily beating our estimates on U.S. (both liquids and gas) and International liquids,” wrote Mehta in a note to clients.
“We remain fully committed to confronting the public health challenge posed by the COVID-19 pandemic by collaborating with industry partners and academic institutions to develop potential approaches to prevent and treat COVID-19,” said Boula.
“Our researchers and scientists have made important progress toward developing an effective vaccine though significant additional work remains,” added Boula.
Some financial analysts rate Pfizer as one of the best dividend stocks of 2020
Because of Pfizer’s coronavirus vaccine and high dividend, some financial experts rate the company’s stock as a buy.
Edward Jones analyst Ashtyn Evans noted that Pfizer’s other successful medications make the stock a buy. She said that Edward Jones’ “positive view of the stock is driven by the company’s extensive pipeline and lower valuation relative to peers.”
“Pfizer’s operating structure allows for cost-cutting following patent losses to reduce the margin pressure from lost high-margin drug sales. Overall, Pfizer’s established product line creates the enormous cash flows needed to fund the average $800 million in development costs per new drug. In addition, the company’s powerful distribution network sets up the company as a strong partner for smaller drug companies,” said Conover.
“Pfizer’s entrenched consumer and vaccine franchises create an added layer of competitive advantage”, added Conover.
Conover also noted that Pfizer is one of the best dividend stocks “stemming from brand power in consumer healthcare and manufacturing cost advantages in the vaccines division. Pfizer recently created a consumer healthcare joint venture with GlaxoSmithKline that could lead to an eventual divestment of the unit.”
Pfizer’s impressive cash flow and potential profits from its COVID-19 vaccine make Pfizer one of the best dividend stocks of 2020 and beyond.
8. Coca-Cola
While Coca-Cola(NYSE:KO) stock dropped because of the coronavirus crisis, the beverage company has one of the best dividend stocks of 2020. Coke’s dividend yield of 3.47% should be impressive to investors.
“At a high level, we believe there are characteristics endemic to the nonalcoholic beverage industry more generally, as well as Coca-Cola’s specific positioning within this industry, that result in a competitively advantaged business,” said Johnson.
Coca-Cola stock is one of the best dividend stocks of 2020
“While the company is disproportionately exposed to beverage categories that are in secular decline, we believe it has the brand equity to induce demand for reformulated variants of its most popular trademarks, the resources to reorient its portfolio toward drink categories that are more consistent with the consumer ethos, and the scale to fulfill these endeavors profitably,” added Johnson.
In addition to Morningstar, HSBC analyst Carlos Laboy said that Coke stock is undervalued. He also believes that Coke bottlers are “poised to accelerate their growth contribution [to Coca-Cola’s profits] as they grow into market developers with better tools and a richer service culture.”
Coca-Cola is one of the best dividend stocks of 2020 because of its cash flow and resilience through economic downturns.
9. Home Depot
As the coronavirus pandemic hurt many corporations, Home Depot’s (NYSE:HD) sales rose. The corporation’s stores helped many people who were homebound in the spring. Home Depot’s Q1 2020 revenue jumped 7% to $28.26 billion. The company’s 2.27% dividend yield makes it a good divident stock to buy for investors. Home Depot’s CEO, Craig Menear, spoke about the company’s results.
“As the COVID-19 pandemic evolved, we anchored to the core values of our Company by focusing on two key priorities: working to ensure the safety and well-being of our associates and customers, and providing our customers and communities with essential products,” said Menear in a statement.
“We took early and decisive action to intentionally limit customer traffic in our stores which we believe had a significant impact to sales in many markets,” added Menear.
Home Depot is one of the best dividend stock to financial experts
Brian Nagel is the senior equity research analyst at Oppenheimer. He believes that Home Depot is one of the best dividend stocks of 2020. He thinks that Home Depot benefited from the recent nationwide quarantine.
“I think Home Depot is one of the companies that is benefiting or really capitalizing, performing well through this Covid-19 crisis and is likely to perform well as the crisis headwinds abate,” said Nagel.
“More people are spending more time in their homes, and you’re seeing that increase spend as more people spend more time working on their houses,” added Nagel.
Jefferies equity analyst Jonathan Matuszewski noted that Home Depot should improve in its next earnings report because of Memorial Day sales.
“Given HD’s commentary, it will be key to understand the maintenance or potential loosening of such actions heading into the typically-promotional Memorial Day Weekend,” said Matuszewski.
“If the home improvement centers can constrain incremental expenses to meet outsized traffic while still protecting customers/employees, EPS[earnings per share] should improve,” added Matuszewski.
Home Depot is one of the best dividend stocks of 2020 because of its service to customers through the COVID-19 pandemic.
10. Merck
In addition to Pfizer, Merck is a pharmaceutical company that is one of the best dividend stocks of 2020. Mercks’s dividend yield of 3.16% is impressive to investors.
Merck’s Q2 2020 revenue dropped to $10.87 billion because of the COVID-19 crisis. CEO Ken Frazier spoke about the results.
“As expected, social distancing measures in many regions negatively impacted second-quarter volumes for many of our products. However, customer access to care is steadily improving, including in our portfolio of vaccines, which was hit particularly hard this quarter,” said Frazier.
“Both vaccine candidates will soon enter the clinic and we have begun investing to facilitate our ability to manufacture hundreds of millions of doses,” said Frazier.
Financial experts say Merck stock is a buy
Morningstar director Damien Conover is bullish on Merck stock. He noted that Merck’s patents make the company one of the best dividend stocks of 2020.
“Patents, economies of scale, and a powerful intellectual base buoy Merck’s business and keep it well shielded from the competition. Patent protection should continue to keep competitors at bay while the company strives to introduce the next generation of drugs,” said Conover.
“Further, the company’s enormous cash flows support a powerful salesforce that not only sells currently marketed drugs but also serves as a deterrent,” said Conover.
“As a result, Merck offers a powerful partnership opportunity for externally developed drugs. The cash flows also put the company in the rare position of supporting the approximately $800 million in research and development,” added Conover.
For investors that want a strong pharma stock with good dividends, Merck is an excellent choice.
The best dividend stocks of 2020 show resilience
While 2020 has been a brutal year for many stocks, dividend stocks have proven resilient. With strong cash flows and reliable quarterly payouts, investors can rest assured with these stocks in their portfolios. With TradingSim’s blogs and charts, investors can find the best dividend stocks of 2020 to buy and hold.
