Investors considering the implications of Donald Trump's re-election should not overlook dividend stocks. His victory suggests that certain policies, like Kamala Harris's proposal to raise the stock buyback tax from 1% to 4%, are unlikely to be implemented. This is positive news for investors focused on shareholder returns, as stock buybacks have been strong, with S&P 500 companies repurchasing approximately $960 billion in the last year, which accounts for 65% of their free cash flow.
A significant aspect of Trump's economic plan is the proposal to cut corporate tax rates from 21% to 15%, which can boost net income margins. With lower tax rates, companies have more cash available for dividends, enhancing shareholder returns. For S&P 500 dividend-paying companies, a six-percentage point tax cut could increase income and payout by about 7% to 8%, given all other conditions remain constant, although this lower tax rate would apply only to domestic production.
Companies with a considerable portion of their operations in the U.S. stand to benefit the most. Small-cap stocks, with most of their revenue from North America, such as those in the Russell 2000 index, are particularly poised to gain. Stocks like Camping World, Crescent Energy, and Kodiak Gas Services, known for attractive dividend yields, saw an average increase of nearly 6% following Trump's projected victory. These companies offer an average yield of 3.5%.
Investors can consider exchange-traded funds (ETFs) focusing on small-cap dividends, such as WisdomTree U.S. SmallCap Dividend (DES) and ALPS O’Shares U.S. Small Cap Quality Dividend (OUSM), which offer yields around 2.6% and 1.3%, respectively. Even large-cap companies with substantial U.S. operations, like Dollar General, J.M. Smucker, and Starbucks (SBUX, Financial), may benefit, offering an average yield of 3.2%.
Additionally, domestic producers like Caterpillar and Deere show potential despite lower dividend yields, while Ford offers a yield above 5%, having paid special dividends in recent years. Although challenges from tariffs and EV policies are possible, the lower tax rate for domestic production should aid small-cap companies and their dividends significantly.
