The Fiscal Cliff Deal
Late into the evening on January 1, 2013 the U.S. House of Representatives approved a bill, already passed by the U.S. Senate that will permanently set dividend taxation at 15% for individuals making less than $400k ($450k family). Additionally, the rate is set to increase to 20% for individuals making over $400k ($450k family). This has a been a key issue for dividend stocks over the past few months, as the expiration of the Bush tax cuts would have taxed dividends as ordinary income.
Many have rotated away from these stocks because of this risk, however as the tax rates are now known, it seems like a good time to reconsider these names. Investors have historically looked towards dividend-paying companies for the current income provided, the potential for growth in payments and for equity appreciation potential. Some investors like mitigate single stock risk by buying a basket of dividend-paying stocks. The iShares Dow Jones Select Dividend ETF (DVY) is very popular. It holds mainly large-cap dividend paying companies and yields about 3.5%. This article focuses on three individual stocks that yield at least 3% and have market capitalizations of at least $26 Billion. This list is meant as a base for further research.
Public Service Enterprise Group (PEG)
Dividend Yield: 4.6%
Market Cap: $26 Billion
PSEG is a large utility company, primarily operating in the Northeastern states, with a heavy presence in New Jersey. The company had to do a significant amount of repairs to its infrastructure as a result of Hurricane Sandy in late 2012 and investors will be looking to see how exactly this natural disaster has affected earnings. The stock was down by about 5% for 2012 before dividends are accounted for. PSEG trades for just shy of 13x 2013 earnings estimates. I wrote about PSEG in my December 13th article, "3 Utilities With 4-5% Dividend Yields To Buy For 2013".
Dividend Yield: 5.49%
Market Cap: $65 Billion
Altria, a large US tobacco producer pays out a sizeable dividend and many investors look towards the company for this payment, coupled the potential for growth in payments. Altria is largely famous for its Marlboro brand of Cigarettes. The stock was up approximately 6% in 2012, not including dividends paid to shareholders. I featured Altria in my December 23rd, 2012 article, "3 Tobacco Stocks With Dividend Yields Of At Least 4% That Are Poised For Gains In 2013".
Automatic Data Processing (ADP)
Dividend Yield: 3.00%
Market Cap: $28 Billion
Automatic Data Processing is one of the nation's largest payment processing companies. The stock was up approximately 7%, not including dividends paid to shareholders. I wrote an article on ADP on December 12th, 2012 titled, "Automatic Data Processing: Strong Upside Potential From Rising Interest Rates", which talked specifically about how the company will benefit from rising interest rates over the long term. Although ADP has a smaller dividend than the other stocks mentioned, the company has increased dividends for 38 consecutive years and in late 2012 ADP increased its dividend by 10%.
Many are upset with US Government for the way that "Fiscal Cliff" has been dealt with. The US Government still has two big "cliffs" that need to be solved. Those are the debt ceiling and the sequestration cuts, both which need to be resolved in the next two months. However, many are reassured by the clarity and certainty that Congress has finally provided with dividend and income taxation. This dividend clarity should help the companies in this article, as shareholders will be more comfortable owning these names as the tax rates for their dividends are finally known.
Note: At the time of writing this article, President Obama has not yet signed this bill into law.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.