For months, investors in dividend stocks have stared down the barrel of the fiscal cliff's potential impact on tax rates. More than any other group, dividend stocks would have suffered from the cliff, as 2012's 15% maximum rate was scheduled to rise to as much as 43.4%. But under the fiscal-cliff compromise, dividend tax rate increases will be limited to 20% for singles earning more than $400,000 and joint filers with income above $450,000. That's a big part of why the Dow Jones Industrials (^DJI 0.40%) were up about 220 points at midday.
The news is even better for those Dow components that pay the biggest dividends. At the top of the list, investors in telecom giants AT&T (T 1.02%) and Verizon Communications (VZ 1.17%) can thank the dividend tax compromise for preventing what could have slashed a full percentage point of after-tax yield off their returns. The two rivals will continue to plow capital expenditures into expanding their wireless networks, but these cash cows still have more than enough money to return to shareholders, and they have consistently found ways to boost those payouts over time. AT&T is up 2.5%, while Verizon has added 1.8%.
The news is almost as good for pharmaceutical kings Pfizer (PFE 0.55%) and Merck (MRK 0.37%). With their yields in the 4% range, highest-bracket taxpayers will hang onto about 0.8 percentage points of after-tax return thanks to the rate reduction. Yet while these companies earn substantial profits from their existing stables of drugs, they must also constantly search for new candidates in order to keep their pipelines full and mitigate the inevitable sales decay that occurs when existing drugs go off patent. Pfizer's up more than 2% today, but Merck moved only fractionally higher.
Finally, Intel (INTC -9.20%) has jumped 2.6% as value investors seek to cash in on the stock's attractive 4.4% dividend yield. Intel has been criticized for its sluggish attempts to capitalize on mobile trends, but with the company producing servers for mobile devices, Intel's getting an indirect benefit. Moreover, with shrinking transistor fabrication, Intel has a strong chance at becoming a bigger threat in the mobile space.
