Will Dividend ETFs Be Crushed By An Obama Presidency?

In the 89th edition of the Festival of Stocks, you'll find a variety of features on dividend investing. Most of them will focus on individual company picks.

For instance, one writer in the "Festival" is fond of Harley Davidson (HOG) because it trades at a discount to its historical P/E average and the company has grown its dividend for 14+ years. Another author recognizes American Capital Strategies (ACAS) for its dividend growth rate and exceptional yield.

Yet there's a more pressing concern for dividend investing in general; that is, investors wonder whether Obama would seek to raise taxes on dividends up from the current level of 15%, and, if that were to happen in an Obama presidency, how might that affect dividend stocks.

Many have already predicted a huge sell-off for stock assets in an Obama presidency. Indeed, Obama has suggested that he would tax dividends at marginal income tax rates and raise the tax rate on long-term capital gains back to 28%. (Keep in mind, what's said on the campaign trail typically stays on the campaign trail.)

What's more, the stock market is not a one-trick pony. It doesn't move higher or lower due to political risks alone. Therefore, it is premature to assume that investors would abandon higher-yielding companies due solely to an increase on the taxes owed for investing in those companies.

It may be more critical to evaluate how an Obama presidency will affect certain segments of the economy. For instance, health care and "old energy" may be easy to dissect; that is, Obama initiatives are likely to target the drug makers for more affordable prescription drugs, while the government might also stake a larger claim to "Big Oil's" profits.

Still, is the demand for oil going to drop off a cliff because our government may ultimately take a bigger chunk of Exxon-Mobil's money? Will the demand for medications disappear, simply because the government will want a bigger piece of pharmaceutical profits? Profit margins for health care and traditional energy would likely drop, but demand may keep investors intrigued.

More importantly, perhaps, families need to invest for their future. It follows that we need to find ways to increase our fortunes... taxation warts and all.

And so it will go with dividends. Regardless of tax policy or business-unfriendly moves, investors are going to want something they can rely on (like dividends).

Here are a number of "Dividend ETFs" that are worthy of the risk-reward relationship:

1. WisdomTree Emerging Market High Yield (DEM). I discussed WisdomTree's DEM in detail in Tuesday's column. As long as the U.S. slow-growth environment doesn't become a severe recession, the global growth story will continue. This dividend ETF with an SEC 30-day rolling yield of 5.5% has been less volatile than its emerging market competitors.
2. State Street SPDR S&P International Dividend ETF (DWX). This fund tracks an index of 100 companies, each of which had to have 5 years of profitability and earnings growth. It is less expensive at an annual expense of 0.45% than similar international dividend funds. And it pays out a higher annual yield at 7.6% (quarterly). Learn more about DWX from my April commentary.
3. iShares Dow Jones Select Dividend Index (DVY). This one represents the 100 highest paying dividend companies, 2/5 of which are financial companies. That has hurt DVY over the last year tremendously. However, DVY now pays a 4.25% yield... far better than treasuries or CDs. (This one appears in my editorial, "The Best Sector ETFs for the the Economic Recovery.")

Even better, Obama is likely to support federal relief for homeowners. In so doing, greater "mortgage loan relief" could stabilize home prices and bring buyers back to real estate. How much would Bank of America (BAC), Wells Fargo (WFC) and JP Morgan Chase (JPM) benefit from an increase in sales volume?

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[veeblefetzer:]

So, many people are predicting a huge stock selloff because of a possibility of higher taxes? Maybe we should stick with our current policies of huge deficits, lack of government oversight causing problems like the subprime mortgage mess, a falling dollar, huge trade deficits, etc. etc.

Worries about a stock selloff because of a change in tax policies are ridiculous.

2008 May 22 07:50 AM

[Eduard:]

Assuming Obama is elected and assuming he is increasing taxes....this may potentially have a negative effect on the stoc exchanges. But I can imagine this negative impact is potentially going to be more than compensated by the savings from Iraq (assuming he withdraws), a more reponsable budget policy, and a better trade balance. Republicans have lost over the last 8 years any credibility in reference to economic issues. The bush family has only done a great jop for the guys who have financed their elections...i.d. the arm industry (Carlyle) and the Oil Industry.

Thus this article is weak in its argumentation.

2008 May 22 08:38 AM

[E F Nuttin:]

With Obama as President, I think dividends are the least of our worries.

2008 May 22 08:46 AM

[bill d:]

Not to worry - never happen.

2008 May 22 10:48 AM

[Panskeptic:]

Stop whining. The stock market always does better under Democratic presidents. The last seven years have not been the market's finest.

What is most likely to happen is that the favorable tax treatment of dividends will be capped, so that small fry will be completely protected and only the biggest players will have to face a higher rate, which is as it should be. It is not the government's role to protect the rich from everybody else, though Bush preaches otherwise.

2008 May 22 11:11 AM

[karchad:]

i think speculation as to Obama's effect on the market is just that: speculation (disclaimer: I'm a Republican).... I think market performance is pretty random concerning Republican/Democrat. It's skewed in favor of Democrats the last 13 years because of the good performance under Clinton, and the bad one under Bush (no judgments here). for those of you who are young, just because the market did well under clinton, and bad under Bush, I would caution you not to gamble your money with rash conclusions. To sum up, i think absolutely NOTHING can be predicted as far as the market is concerned. It's senseless to invest your money based on it.

2008 May 22 01:30 PM

[adan:]

two things:

one) would long only etf's be crushed by any president continuing the current policies?

two) re: "...However, DVY now pays a 4.25% yield... far better than treasuries or CDs." - incorrect, there are many cd's avail right now for up to 4.6% or higher, without risk of capital

thanks

2008 May 22 03:25 PM

[whisperonth...:]

Perhaps Obama will use that chunk of Oil money to pay for the health care program instead of asking us for it. Perhaps (dare I even suggest it?)... just perhaps Obama won't even get into office? One can only hope he doesn't.

2008 May 22 06:02 PM