The S&P 500 has gained more than 12% since Donald Trump was elected president. These gains are largely due to the "Trump rally."
The market has rallied in anticipation of pro-business policies and tax reform from President Trump. And it’s easy to see why… President Trump’s initial tax reform ideas from before he was elected are pro-business.
Chief among these is a proposed reduction of the maximum corporate tax rate from 35% at the federal level down to 15%.
Additionally, President Trump’s pre-election tax reform ideas called for:
Tariff on imported goods
One time, 10% repatriation tax holiday
End to deferral of taxes on corporate income earned abroad
In short, President Trump wants to reduce corporate taxes to make American businesses more competitive globally, and incentive them to manufacture domestically rather than abroad.
Tax reform is not easy. President Trump will very likely not be able to drastically reform corporate taxes as he’d originally hoped.
With that said, the tax code should move in the direction outlined above…
But how will all of this affect dividend income from stocks?
The Trump administration has no plans to change the current 20% maximum qualified dividend tax rate. That won’t change.
What will change is dividend stock’s ability to pay dividends. Simply put, lower corporate taxes mean more income. More income means corporations will have the ability to pay higher dividends.
Dividend investors will want to focus on high quality dividend growth stocks that make the bulk of their money in the United States and pay consistently rising dividend income.
A short list of just such companies:
AT&T (T) – 96% of revenue from the United States in 2016
AbbVie (ABBV) – 62% of revenue from the United States in 2016
Target (TGT) – Virtually all revenue from the United States
What do the 3 companies above have in common? All three have dividend yields of 3.9% or higher and generate the majority of their revenue in the United States.
All 3 are also Dividend Aristocrats; a group of 51 stocks with 25+ years of consecutive dividend increases.
One thing won’t change regardless of who is president – companies with strong competitive advantages and shareholder friendly managements will likely continue to pay rising dividends.
Some companies are better suited for different political climates than others. Based on President Trump’s statements, the United States will likely make efforts to reward companies that provide jobs in the United States rather than overseas.
These companies will likely be more tax advantaged relative to their globally outsourced peers – which could mean more dividend income down the line.
The biggest advantage of the proposed Trump tax cuts for dividend investors are lower corporate income tax rates. When after-tax profits rise, dividends tend to rise as well.
This is especially true with mature blue-chip stocks because these companies can’t typically reinvest higher income into growth, so they reward shareholders with dividends instead.