NEW YORK, Jan 12 (Reuters) - Even before U.S. President George Bush this month unveiled his tax cut plan that could eliminate dividend taxes for investors, Merrill Lynch's chief U.S. strategist picked 18 dividend-paying companies he said could offer investors safety and income, according to Barron's magazine.
Bernstein's picks include Merck & Co. Inc. (NYSE:MRK), Procter & Gamble Co. (NYSE:PG), Abbott Laboratories Inc. (NYSE:ABT), Gillette Co. (NYSE:G), 3M Co. (NYSE:MMM) and BellSouth Corp. (NYSE:BLS).
"Let Us Praise Steady Dividends," the original article in Barron's (subscription only – link) adds to the above information with a little-known aspect of the "stimulus package":
Of course, there will be other ways to benefit from a dividend tax cut. One lower-profile area set to benefit is the market for perpetual preferred stock. Those shares pay a dividend (although they typically give the issuer the option not to make the dividend payment), and they do not mature.
There is about $24 billion of perpetual preferred stock outstanding, estimates William Scapell, a director at Merrill Lynch. That's about 15% of the larger preferred market, which also includes trust preferreds and preferreds issued by real estate investment trusts. Those two, however, wouldn't benefit from the Bush plan because their issuers have already received a tax benefit.
Unfortunately, many of the more appealing preferred issues have rallied sharply in anticipation of the tax change. For example, Alabama Power, a unit of Southern Co., has perpetual preferred that pays a 5.2% dividend. On December 18, the yield to the 2008 call date was 11.3% and now it stands at 5.96%.
Likewise, Citigroup's perpetual preferred, with its 6.365% dividend, once offered investors a yield of 9.26% but now yields 5.53% to its 2007 call. But if Bush's tax cuts and Bernstein's predictions of a more risk adverse world come to pass, even low dividends could command the market's attention.
How much does W love the rich? Giving them $674 billion is a very public display of affection.
Say farewell to growth stocks for a while. Kiss computer technology, wireless, biotech and nanotech goodbye.
The "stimulus package" is already shaping up to be a scandal analogous to Daddy's S&L debacle, which was quite generous to W's competence-free brother Neil Bush.