7 Stocks That Could Benefit From a Capital Gains Tax Hike

Fri., May 14th, 2021 | MarketBeat Stiaff

One thing every investor needs to learn is the effect of capital gains on their investments. Every time an investor sells a stock that has appreciated in value, that capital gain is subject to being taxed. Stocks that are held for less than a year pay a short-term capital gains tax rate. Stocks that are held for over a year pay a long-term capital gains tax rate.

In general, a capital gains tax hike is a bearish indicator for stocks. However, there are a couple of strategies that can help investors avoid some of the tax hit. One strategy is to keep your investments in an individual retirement account (IRA) or 401(k). However many higher-income earners want to have more access to the funds in their brokerage accounts.

A sound strategy for these investors involves buying dividend stocks. Dividend income is also taxed (unless it is reinvested), but typically when the capital gains tax rate is raised, the dividend income rate stays the same. This makes dividend stocks more attractive.

Investing in dividend stocks is never a bad idea, but at times when the capital gains tax rate is favorable, growth stocks provide a better reward for investor capital. But when long-term capital gains tax rates go up, those gains can get expensive.

In this special presentation, we’ll give you seven stocks that have a nice dividend yield and a strong story to go along with them.

#1 - AT&T (NYSE:T)

AT&T (NYSE:T) is a stock that many investors love to hate. And when the choice is between T stock and some growth stocks, AT&T has its downside. But as a dividend stock, there are few companies that reward investors quite like AT&T.

To begin with, the company is a Dividend Aristocrat, having increased its dividend payout for the last 37 consecutive years. Over the last three years, the company has increased its dividend by an average of 6.12%. And, AT&T currently pays one of the highest dividend yields at 6.47%. Dividend yield is not always a true indicator of the strength or quality of a dividend. However when combined with other factors such as dividend aristocrat status it is in indicator that a company prioritizes shareholder value.

In 2020, AT&T did not increase its dividend leaving some to wonder if the company’s dividend aristocrat status is in jeopardy. It seems unlikely. The dividend is well covered by earnings and the company, to its credit, used the savings from not increasing the dividend to get its balance sheet in better shape.

About AT&T

AT&T, Inc is a holding company, which engages in the provision of telecommunications media and technology service. It operates through the Communications and Latin America segments. The Communications segment offers services to businesses and consumers located in the U.S., or in U.S. territories, and businesses globally. Read More

Current Price: $15.73
Consensus Rating: Buy
Ratings Breakdown: 8 Buy Ratings, 7 Hold Ratings, 1 Sell Ratings.
Consensus Price Target: $21.89 (39.2% Upside)

#2 - Coca-Cola (NYSE:KO)

Coca-Cola (NYSE:KO) is another stock that is drawing a lot of headlines for better or worse depending on your political leanings. However this is one of those times when you have to check your emotion at the door and consider the opportunity.

First of all, despite the absence of live events and businesses being closed, Coca-Cola posted revenue that was “only” 9% lower in 2020 than in 2019. That has to be encouraging as the economy reopens. Case in point, first quarter revenue was up approximately 5% from the prior year’s first quarter. And that’s with much of the country being under some form of mitigation.

Next Coke holds the status of a Dividend King. This means it has increased its dividend payout for at least 50 consecutive years (it’s 59 years for KO stock). And despite the pandemic the company managed to increase its dividend in 2020 and has done so again in 2021. Its three-year average rate of growth sits at over 10%.

About Coca-Cola

The Coca-Cola Co engages in the manufacturing and marketing of non-alcoholic beverages. It operates through the following segments: Europe, Middle East and Africa, Latin America, North America, Asia Pacific, Global Ventures, and Bottling Investments. The company was founded by Asa Griggs Candler on May 8, 1886 and is headquartered in Atlanta, GA.

Current Price: $59.66
Consensus Rating: Buy
Ratings Breakdown: 9 Buy Ratings, 3 Hold Ratings, 0 Sell Ratings.
Consensus Price Target: $67.80 (13.6% Upside)

#3 - AbbVie (NYSE:ABBV)

AbbVie (NYSE:ABBV) is a stock that got bypassed as investors spread their investment dollars to companies that had a stake in the Covid-19 vaccine and/or therapeutic race. But now that the dust has settled, it’s time to reconsider this dividend darling.

ABBV stock is closing in on Dividend King status. It has raised its dividend for 49 consecutive years. Considering its last increase was in Oct. 2020, it may join that elite club this year. And AbbVie has increased its dividend by an impressive 84.37% over the past three years.

Analysts have been, in my opinion, nit-picking at ABBV stock because the company will lose its exclusive U.S. rights to its massively popular arthritis drug, Humira, in 2023. That’s a logical concern but it loses sight of AbbVie’s robust pipeline and the fact that it has two immunology drugs, Skryizi and Rinvoq currently in market.

Those two drugs delivered over $2.2 billion in net revenue in 2020 and are forecast to reach $15 billion by 2025.

About AbbVie

AbbVie, Inc is a research-based biopharmaceutical company, which engages in the development and sale of pharmaceutical products. It focuses on treating conditions such as chronic autoimmune diseases in rheumatology, gastroenterology, and dermatology, oncology, including blood cancers, virology, hepatitis C virus (HCV) and human immunodeficiency virus (HIV), neurological disorders, such as Parkinson's, metabolic, comprising thyroid disease and complications associated with cystic fibrosis, pain associated with endometriosis, and other serious health conditions. Read More

Current Price: $137.96
Consensus Rating: Hold
Ratings Breakdown: 6 Buy Ratings, 8 Hold Ratings, 0 Sell Ratings.
Consensus Price Target: $163.40 (18.4% Upside)

#4 - Procter & Gamble (NYSE:PG)

Few stocks say “steady Eddie” as much as Procter & Gamble (NYSE:PG). It’s a defensive stock but over the last five years, investors have been rewarded with a stock price gain of over 63%. Despite that, PG stock is down slightly in 2021 (as of this writing), which makes it a solid buy-on-the-dip candidate. This is particularly true since the company last reported earnings in April and delivered year-over-year revenue growth of 5.2%.

It’s fair to wonder about the effect that rising commodity prices may have on the company’s business. But it’s likely that the company will be able to pass along a modest price increase without having it curtail revenue.

And since this presentation is all about dividend stocks, there are few finer than PG stock. The Dividend King has raised its dividend for 59 consecutive years and has raised its dividend on average by over 13% in the last three years.

About Procter & Gamble

Procter & Gamble Co engages in the provision of branded consumer packaged goods. It operates through the following segments: Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care. The Beauty segment offers hair, skin, and personal care. The Grooming segment consists of shave care like female and male blades and razors, pre and post shave products, and appliances. Read More

Current Price: $142.50
Consensus Rating: Buy
Ratings Breakdown: 11 Buy Ratings, 5 Hold Ratings, 0 Sell Ratings.
Consensus Price Target: $161.50 (13.3% Upside)

#5 - Pfizer (NYSE:PFE)

Whether you have gotten the Covid-19 vaccine or not, there’s no denying that Pfizer (NYSE:PFE) was one of the hottest stocks of 2020. And with the likelihood of booster shots being required in the U.S., the possibility of vaccinating young children, as well as the increasing demand for vaccines throughout the world, 2021 should be another year that growth and income investors should benefit from PFE stock.

Pfizer stock is flat for 2021 and prior to the release of its vaccine, it was struggling to make up for its pandemic drop. Keep in mind that some of Pfizer’s business was affected by the pandemic. However, that should continue to mitigate in 2021 which should provide some added revenue to support the company’s dividend.

The company is not yet part of the Dividend Aristocrat club having only increased its dividend since 2010. However, Pfizer’s dividend payout ratio sits at 4.04% which is well above the S&P 500 average of 1.8%.

About Pfizer

Pfizer Inc is a research-based global biopharmaceutical company. It engages in the discovery, development, manufacture, marketing, sales and distribution of biopharmaceutical products worldwide. The firm works across developed and emerging markets to advance wellness, prevention, treatments and cures that challenge the most feared diseases. Read More

Current Price: $38.02
Consensus Rating: Hold
Ratings Breakdown: 4 Buy Ratings, 9 Hold Ratings, 0 Sell Ratings.
Consensus Price Target: $47.33 (24.5% Upside)

#6 - IBM (NYSE:IBM)

Is Big Blue making a comeback? It certainly looks like it. International Business Machines (NYSE:IBM) has been in a multi-year pivot to the cloud. And by the looks of the company’s first-quarter earnings, the transition is beginning to bear fruit. Revenue was up slightly on a year-over-year basis which is no small achievement coming out of the pandemic.

To be fair, IBM stock is still a far cry from its record high close of over $213 per share in 2013. And the stock is still about 25% below the $180 level it reached in 2017. But IBM is up 18% in 2021 making it a solid choice in the old-school technology space.

IBM has increased its dividend for the past 21 years and in the last three years that dividend increase has averaged 10.34%. The combination of increasing revenue and a solid dividend make IBM a strong choice in an inflationary environment with interest rates likely to stay low for the foreseeable future.

About International Business Machines

International Business Machines Corp. is an information technology company, which engages in the provision of integrated solutions that leverage information technology and knowledge of business processes. It operates through the following segments: Software, Consulting, Infrastructure, Financing, and Other. Read More

Current Price: $128.64
Consensus Rating: Hold
Ratings Breakdown: 2 Buy Ratings, 5 Hold Ratings, 1 Sell Ratings.
Consensus Price Target: $139.20 (8.2% Upside)

#7 - Kinder Morgan (NYSE:KMI)

The last stock on our list is a play on the rebuilding of our nation’s infrastructure. Kinder Morgan (NYSE:KMI) is one of the largest energy infrastructure companies in North America. The company not only earns revenue from the price of energy, specifically natural gas and petroleum, but it also generates income from storing and transporting these liquids and others.

No matter how you view the nation’s renewable energy future, fossil fuels are going to play a significant role in building out that underlying infrastructure. Kinder Morgan relies on volume for its revenue. That was an issue in 2020. However, early indicators suggest that volume is increasing which should serve as a catalyst for KMI stock.

Kinder Morgan also currently has a very tasty dividend yield of 6.2% and has averaged a 107.50% dividend growth in the last three years. Kinder Morgan is not a growth stock, but the stock is up over 50% since November 2020.

About Kinder Morgan

Kinder Morgan, Inc engages in providing pipeline transportation of natural gas services. It operates through the following business segments: Natural Gas Pipelines, Products Pipelines, Terminals, and CO2. The Natural Gas Pipelines segment operates major interstate and intrastate natural gas pipelines and storage systems. Read More

Current Price: $16.11
Consensus Rating: Hold
Ratings Breakdown: 2 Buy Ratings, 6 Hold Ratings, 1 Sell Ratings.
Consensus Price Target: $20.56 (27.6% Upside)

The capital gains tax rate is a policy lever that politicians on both sides of the aisle use to express their belief on the role the government should play in the nation’s economy. Advocates of an economy fueled by the private sector seek to keep capital gains as low as possible.

These individuals are also likely to point out that taxing capital gains from after-tax dollars is taxing the same money twice. On the other hand, advocates of a more activist government seek to raise capital gains to pay for a more expansive government.

Does a capital gains tax affect investors? The fact is a capital gain is only realized when an asset, such as shares of a stock, are sold. However, since selling an asset doesn’t necessarily mean cashing out the investment, there can be many unintended consequences of such a tax hike.

When investors hold onto assets it can have an effect on their individual portfolios because they are not benefiting from diversification. And when investors are choosing to hold their assets rather than trade them, it can have an effect on the broader market as well.