Checking in on the U.S. government's debt problem… Biden's unrealized capital gains tax and the "trickle down" effect… How it's inspiring the biggest trend in Big Tech… Use this tool to find the market's best dividend plays…
By Michael Salvatore, Editor, TradeSmith Daily
Breaking news: The U.S. government has a debt problem.
At the latest reading, public debt was equal to 121% of U.S. GDP. Nominally speaking, it's over $34 trillion and accelerating.
Higher interest rates are making the debt harder to pay off, too... and naturally lending to the acceleration problem. The chart over the past 20 years looks like the start of a parabola upwards.
There are two simple options for fixing any debt problem: spend less and earn more. Ideally, you do both at the same time.
Spending less is clearly not a priority for Washington. A $95 billion foreign aid package for Israel, Ukraine, and Taiwan – alongside, bizarrely, a de facto ban of popular social media app TikTok – was just approved. That tracks with the current rate of debt rise – about $1 trillion every 100 days.
So the other option is to earn more. Yet another problem.
The U.S. government can only earn more money by raising taxes. But it's not earning enough. In 2023, it earned $4.5 trillion in tax revenue while spending $6.2 trillion.
Modern problems require modern solutions, or so they say. So here's what they've come up with...
❖ The White House wants to tax the ultra-wealthy for money they haven't yet made...
With a novel "unrealized capital gains tax" proposal, individuals with more than $100 million in net assets will be taxed on their unrealized capital gains at a rate of 25% per year.
How does this affect you?
Well, unless you're one of less than 10,000 centi-millionaires in the United States, it doesn't. At least, not directly.
The issue with taxing unrealized capital gains on centi-millionaires goes back to an old Reaganism. The effect would "trickle down."
If this goes into effect – and to be clear, it probably won't unless Democrats sweep both this coming election and the next midterms in 2026 – ultra-wealthy investors will be directly incentivized not only to not hold U.S. stocks, but to sell what they have.
If just 5,000 centi-millionaires decide they don't want to tolerate a 25% unrealized capital gains rate and sell, say, $20 million worth of stock each, that's $100 billion in stock market value erased.
Even that conservative estimate of the ultra-wealthy's reaction to this policy is a big chunk. More than that, it weighs on stock prices all the way down. As stocks fall, more investors will sell... possibly causing a cascading effect downward. Soon, there wouldn't be much unrealized capital gains to tax in the first place.
Like I said, the likelihood of this policy actually being implemented is low. It seems more to us like posturing – a way for President Biden to show Democratic voters how willing he is to aggressively raise taxes on the ultra-wealthy.
But low is not zero. And should this come anywhere close to actually going into effect, you can expect the reaction in stock prices to be swift and severe.
How can you protect yourself from something like this happening? Simple: Diversify your portfolio.
U.S. investors overwhelmingly own U.S. stocks. So if you're 100% in U.S. stocks, you're exposed to the brunt of what this policy entails. Buying real assets like precious metals, land, real estate, or foreign-market stocks helps insulate you from this.
❖ Another Big Tech "graduation" to celebrate...
The newest, hottest trend in Big Tech isn't a tech trend.
In its earnings report after the Thursday close, Alphabet (GOOGL) initiated a $0.20-per-share quarterly dividend and approved stock repurchases up to $70 billion.
This follows META's move back in February to initiate a $0.50 quarterly dividend... and has the makings of a powerful attractor for income-hungry investors.
Traditionally, Big Tech companies have relied on share repurchases to return value to shareholders. But once again, recent innovative tax ideas from the White House are urging the biggest U.S. corporations to rethink this strategy. (Part of Biden's tax proposal is to quadruple the tax rate on share buybacks from 1% to 4%.)
Regardless of the reason, dividend initiations are a powerful buy signal. As contributing editor Lucas Downey showed you a few weeks back, stock dividend growers and initiators are quietly some of the stock market's best performers:
Of the Magnificent 7 stocks, only Amazon and Tesla as yet do not pay a dividend. Amazon has famously insisted on plowing all of its profits back into the business itself to fund continued growth, and Tesla's own earnings situation is so volatile that a dividend seems far off.
However, Google's performance after this announcement might make these firms reconsider. GOOGL traded up nearly 10% on Friday. (Disclosure, I own shares of GOOGL.)
If the trend of these widely owned companies initiating dividends catches on, your growth portfolio might suddenly start to look more like an income portfolio – and that's a great thing.
Just take this simple screen, one of the defaults loaded into the software. It searches for any company that's A) profitable and B) that's historically grown its dividend:
And you can get as granular with this as you like. We showed you on Saturday how useful these tools are to get in on the cash flow bonanza in the oil & gas sector. But that's just the beginning of what you could do with them.
Say you're particularly confident in the U.S. consumer and want to focus on stocks that will benefit from consumer strength.
Instead of just dividend growers, you could screen for mid- to large-cap companies in the consumer discretionary and staples sectors with a dividend yield of higher than 1%, a free cash flow yield higher than 1%, and a P/E ratio that's cheaper than the S&P 500 average.
Here's how you would set that up:
Turns out, it's a pretty short list. And not all the stocks that fit this criteria are of high quality. Here are the results of that Screener, sorted by Business Quality Score:
And this is just one of myriad ways you can use TradeSmith's software to find new opportunities ahead of the crowd. To learn how you can start using them, go here.
To your health and wealth,
Michael Salvatore Editor, TradeSmith Daily
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TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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