Obama Wants More Investors' Money, but How Will He Get It?

Updated with afternoon market action.

NEW YORK ( TheStreet) -- In the aftermath of the election, one thing that investors can count on is that President Obama wants more of their money.

Judging from the initial market reaction -- with the Dow Jones Industrial Average down over 270 points to 12,973.37, the S&P 500 ( SPX.X) down nearly 29 points to 1,399.70 and the NASDAQ Composite down nearly 67 points to 2,945.42 in afternoon trading -- investors are less than thrilled with the result.

Financial names have been hit even harder, with the KBW Bank Index ( I:BKX) dropping nearly 4% to 47.78 Wednesday afternoon.

Now that the 2012 presidential election has been decided, the next major political event on the nation's agenda is resolving -- or not resolving -- the "fiscal cliff," which is a combination of tax increases and federal spending cuts mandated under the August 2010 deal between President Obama and Republican members of Congress, that allowed the federal debt ceiling to be raised.

Without further action from our friends in Washington, tax cuts that were passed when George W. Bush was president and extended by President Obama as part of the debt-ceiling deal will expire, which, along with the mandated concurrent federal spending cuts, could send the U.S. economy back into recession, according to many economists.

FBR financial policy analyst Edward Mills on Wednesday wrote that the "status quo" election -- with President Obama staying in office, the Democratic Party retaining control of the Senate and the Republicans retaining control over the House of Representatives - "dramatically increases" the risk of going off the fiscal cliff.

"While it will take several days for the full narrative of the election to develop," Mills said, "we view the result as significantly increasing the volatility related to the negotiations" between the President and Congress, and that "with a slim margin for the President and Republican control of the House, both sides could argue that they have the upper hand in negotiations and will view the election as a validation of their positions."

Credit Suisse global equity strategist Andrew Garthwaite took a much mellower tone when discussing the fiscal cliff on Wednesday, saying that the "Obama victory might make compromise over the fiscal cliff easier than a narrow Republican victory."

Then again, Garthaite summed up the target on investors' back pretty nicely, saying that "Obama proposes to raise the top rate of tax from 15% to 39.6% on dividends (for those earning more than $200K a year) and from 15% to 20% on capital gains (both of these would be raised by a further 3.8% surcharge on investment income under Obamacare), and said that "if implemented in full, we estimate this would take roughly 5% off our fair value of the S&P 500 (a third of the US equity market is owned by individual investors who earn more than $200K a year)."

On a brighter note, Garthaite said that his firm's Washington policy analysts pointed out that "Obama has stated that the dividend and capital gains tax rates 'will go into the 20s', i.e. will be less aggressive than the official line suggests."

Of course, we have no way of knowing at this point how the fiscal cliff negotiations will turn out, but under the most extreme scenario, a taxpayer earning over $200,000 a year, or $250,000 for married couples, can see the tax rate on their dividend income jump from 15% to 39.6%.

For investors in lower tax brackets, there can also be an extreme difference in federal taxes on dividend income. Under the current cap on dividend taxes, if an investor's adjusted gross income is below the $69,600 threshold for married couples for the 25% tax bracket, the investor is paying no taxes at all on qualified dividends, which include most income from corporate bonds and preferred stock.

Investors soon may have to take more care than before in factoring their federal, state and local income taxes into their decisions on income-producing investments. With interest rates being so low for so long, and with the 15% federal income tax cap on qualified taxable dividends, municipal bond rates have been unattractive to many investors for quite some time. That may change now, although even if we fall off the fiscal cliff, many investors will still be better off with taxable investment vehicles.

Two interesting taxable dividend plays that we have highlighted before are Kinder Morgan Energy Partners, LP ( KMP) and AmeriGas Partners LP ( APU). Both are limited partnerships, which offer certain tax advantages to investors, namely, that certain partnership expenses and capital losses are also "distributed" to investors, lowering the tax on the dividend income, or even eliminating the tax in some years. The disadvantage is that dividend income is reported on a Schedule K-1, making it a bit more difficult to file your income taxes, and distributed loss items that lower your taxes now, could affect your capital gain or loss if you eventually sell the partnership units.

Kinder Morgan Energy Partners is mainly a gas pipeline operator. The partnership shares have a yield of 5.89%, based on the most recently quarterly distribution of $1.23 and Tuesday's closing price of $83.58. The company has had a very strong track record for dividend increases over the past several years, and the share price has risen 121% over the past five years, through Tuesday's close.

KMP Chart KMP data by YCharts

AmeriGas Partners LP is a domestic propane distributor. The partnership shares have a yield of 7.25%, based on the most recent quarterly distribution of 80 cents, and Tuesday's closing price of $44.12. APU's shares have risen 67% over the past five years.

APU Chart APU data by YCharts


-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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