Will Trump Policies Lead to Higher U.S. Dividends?
It’s been nearly three weeks since Donald Trump won the presidential election, and Americans are still wondering what to expect.
Will he build a wall? Is Obamacare set to be overturned? Will Trump hike dividend payments? (Wait, what??)
That’s right… With all of the drama and attention-grabbing headlines, you may have missed one of the most important initiatives for investors. Today, I want to show you how the Trump presidency should lead to better payouts for income investors.
Trump’s Plan To Lower Corporate Taxes
One of Trump’s campaign promises was to reduce taxes for corporations. Specifically, Trump has proposed a top corporate tax rate of 15 percent (compared to the current rate of 35 percent).
The idea is that with a lower tax rate, companies would be able to invest more of their cash into growth opportunities. And as the companies grow, more employment positions would open up, domestic GDP would advance, and higher profits would drive the market higher.
This weekend, Barron’s published a featured article suggesting Trump moderate his proposal and set a max corporate tax rate of 22 percent. Barron’s believes that such a tax cut would actually be neutral (in terms of total tax dollars collected). That’s because the decline in the tax rate would give corporations more incentive to increase profits. Plus, there would be less incentive for corporations to expend time and capital to find tax loopholes.
Finally, higher employment levels would lead to more personal income tax, which could help offset the reduction in corporate tax collected.
It’s worth noting that U.S. corporations currently pay the highest tax rates of all developed countries.
A reduction to a 22% tax rate would leave U.S. companies in a much more competitive position. Rather than dilute earnings through tax payments, U.S. corporations could reinvest profits into growth opportunities.
A lower tax rate would also leave companies with more cash on the balance sheet. This cash could (and likely would) be used to pay bigger dividends. That’s great news for income investors!
But there’s an even bigger windfall that may be in the cards for dividend investors…
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Repatriation Sets the Stage For Big Dividend Payments
In addition to proposing lower corporate tax rates, Trump has also suggested a one-time amnesty deal that would boost domestic cash balances for U.S. corporations.
Here is the problem…
U.S. corporations have accumulated an estimated $2.5 trillion in foreign profits. As long as these profits are held overseas, corporations are able to avoid paying U.S. corporate taxes on these profits. Since the U.S. has the highest developed nation corporate tax bracket, companies will naturally avoid taxation if possible.
But if U.S. corporate taxes were lower, corporations would have an incentive to “repatriate” or bring those profits back to the U.S..
To help encourage this repatriation, Trump has proposed a one-time deal that would allow corporations to bring these foreign profits back to the U.S., facing only a 10% tax on the overseas profits.
This could be a huge opportunity for income investors!
Keep in mind, the companies with the biggest overseas cash balances are some of the most mature companies. These companies have less of a need to invest cash into new growth opportunities. Instead, these companies are more likely to pay excess cash to investors through dividends. In addition to dividend payments, these companies are also likely to have big share buyback programs.
Bottom line, a lower tax rate combined with a “repatriation” amnesty opportunity would dramatically increase U.S. corporate cash balances. And with that cash in play, we can expect dividends and share buybacks to increase over the next year.
Which Stocks Might Benefit?
A recent Bloomberg article provided some color on which companies would benefit most from a repatriation tax incentive. Below is a chart detailing some of the largest offshore cash positions held by U.S. companies:
With $216 billion in overseas cash, Apple Inc. (AAPL) is by far the largest beneficiary. Microsoft Corp. (MSFT) is a distant second with $108.9 billion in non-U.S. cash.
Both are companies that I’ve recommended to subscribers of my Lifetime Income Report dividend newsletter. The beauty of this situation is that both companies are mature corporations with little need for massive cash balances.
Both Apple and Microsoft are currently paying lucrative dividends to shareholders.
Apple currently pays a 57-cent quarterly dividend which adds up to a 2.04% yield. But with 5.33 billion shares outstanding, the company’s $216 billion in overseas cash amounts to roughly $40.50 per share in cash. If the company were to repatriate most of its overseas cash, investors should expect to receive a large portion of this cash either through dividends or share buybacks.
Similarly, Microsoft has 7.78 billion shares outstanding. So the company’s $108.9 billion in overseas cash amounts to roughly $14 per share in cash. That cash could go far in boosting the 39-cent quarterly dividend investors currently receive.
Remember, when selecting dividend stocks, it’s important to pick companies with strong finances. Taking advantage of Trump’s corporate tax proposals could go far in boosting the cash dividend payers have to pay to investors.