Congress avoided the “fiscal cliff” disaster with a move that effectively will raise taxes on most American workers. Investors will now pay higher taxes on dividends and capital gains. By allowing the payroll-tax cut to expire and raising the top income-tax bracket from 35 percent to 39.6 percent on joint filers earning at least $450,000 and individuals $400,000, the stock market was pleased.
Investors acted promptly two days after the tax deal and new money came into the market. The tax deal from the “cliffs” made some investors happy as the Standard & Poor’s 500 reached a five-year high at 1466.77 and the Dow Jones industrial average soared 497 points to 23,435.21 by Jan. 4.
The Bush tax cuts on top brackets will also be applied to dividends, which prior to 2003 were considered ordinary income. Now wealthy investors have to think twice before buying dividend stocks with a rate boost to 23.8 percent on capital gains and dividends.
The dividend and capital gain rates will be low for most investors, but the wealthy will still pay more. Investors’ worries can now give way to concerns like earnings and stock paybacks from the shares they own.
Washington politicians avoided a fall off the cliff, but many of the heavy decisions on spending cuts were postponed until the end of the first quarter. Now we can look for volatility in the market as the year progresses. By March, those difficult debt ceiling and spending cuts will be on the front burner, and it could get hectic for the average investor.
Two Town Crier “50” stocks experienced recent activity.
• Applied Materials Inc. (AMAT; $11.55) shows indications of solid potential for great returns in 2013, and the company should begin to grow again.
Applied Materials is the global leader in providing wafer fabrication equipment for the semiconductor, flat-panel display and solar photovoltaic industries. Its competitive advantage is the high cost customers face if they switch vendors after integrating Applied Materials’ offerings in their products.
Applied Materials is a $13.5 billion company that offers a 36-cent annual dividend. At closing Jan. 4, that equated to a 3.224 percent dividend yield. In addition, Applied Materials is aggressive in buying back its own stock.
Analysts see significant growth potential with a nice dividend in 2013.
• Cisco Systems Inc. (CSCO; $20.23) started fiscal year 2013 on an upswing. Cisco reported net income of $2.6 billion, or 48 cents per share, on revenue of $11.9 billion. This exceeded analysts’ estimates of 46 cents per share and represented an 11 percent growth. Cisco is also seeing improvement in its service business, with revenue growth at 12 percent year-over-year.
Cisco joined NXP Semiconductors N.V. in investing in Cohda Wireless, which is working on advancing intelligent transport systems and car-to-X communications. The purchase price was not released, but shares rose modestly.
Analysts’ opinions are varied, but numerous predict Cisco to outperform the industry in 2013.