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No Need to Worry about Taxmageddon

July 02, 2012 | About:

With November elections fast approaching there’s plenty for investors to worry about, including a resurgence of bashing utility stocks.

For example, despite “resigning,” Nuclear Regulatory Commission (NRC) Chairman Gregory Jaczko is likely sticking around until after voters go to the polls this fall.

The increasingly activist and unpredictable Federal Energy Regulatory Commission (FERC) and Federal Communications Commission (FCC) are special concerns.

The FCC can’t do much to close the capital spending gap between Big Two AT&T (NYSE:T) and Verizon Communications (NYSE:VZ) — which invested $4.7 billion and $3.7 billion, respectively in the first quarter--and nearest rival Sprint Nextel (NYSE:S), which spent just $700 million while slipping closer to bankruptcy. But it can delay distribution of needed spectrum.

What income investors don’t need to worry about, however, is the “Taxmageddon” scenario envisioned by many pundits, should the Bush-era dividend tax rates expire. To be sure, rates are likely to rise from the current 15 percent, given Democrats and Republicans will have to compromise to reach any deal.

But according to the Federal Reserve Board’s Finance and Economic Discussion Series, there was little if any lasting impact on dividend-paying stocks following the tax cuts’ passage in 2003.

Real estate investment trusts (REIT), for example, were left out of the tax cut yet were among the top-performing dividend-paying sectors up to the crash of 2008-09. This suggests little reaction will follow — other than of the knee-jerk variety — if rates do go up.

Dividend-paying stocks did perform well in the past decade, in large part because capital gains were tough to come by. But as a recent white paper from Miller Howard Investing states, there’s no reason to expect that demand to flag, especially since the main alternative is bonds that are already taxed at full rates, pay much lower interest and can’t grow dividends.

If you’re still worried about Taxmageddon, simply pick up some Australian and Canadian stocks, whose home country shareholders couldn’t care less about US tax rates. Or buy some of today’s suddenly cheap master limited partnerships (MLP), which are unlikely to lose preferred tax status as they represent only $1.6 billion in prospective new levies.

One solid MLP is Energy Transfer Partners (ETP), which announced a deal with its general partner Energy Transfer Equity (ETE) to pool assets acquired in the now completed Southern Union (SUG) merger, as well as the planned deal for Sunoco (SUN). Energy Transfer Partners will own 40 percent of the new venture, while the general partner will own 60 percent.

The deal removes a great deal of uncertainty about future asset drop downs from the general partner, as well as financing concerns for the Sunoco deal. Fitch — the credit rater with the most credibility now — has affirmed Energy Transfer Partners’ ratings and views the structure “favorably.”

About the author:

Investing Daily provides stock market advice and investment newsletters to help independent investors achieve a secure and rewarding financial future. The site’s coverage focuses on finding the most profitable emerging trends in the investment universe to bring investors pragmatic and in-depth coverage of the names that are taking advantage of these opportunities.

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