With the start of a new year fast approaching, we are already seeing what the impact of the pending tax laws are having on the markets. Income stocks, or dividend stocks that pay large and increasing quarterly dividends, are being heavily sold on a daily basis.
The new 2013 tax code is currently set to increase the dividend income rate from 15% up to a whopping 43.4%, This is sending institutional holders to the sidelines, driving the price of these stocks to new lows.
What does this mean for the little guy, who doesn’t own 250,000 shares of a utility company and couldn’t care less about dividend income? Well, it presents a buying opportunity play on the Utility ETFs. Yes, catching a falling knife in a downtrend is foolish. Nobody can time a market like that. But what we can do is add it to our list of plays to watch out for as the fundamentals in these stocks reassure investors that they are a good investment. Not to mention, if Capital Hill and the White House come to an agreement on amending the tax increase on dividends.
Take a look at ProShares Ultra Utility ETF (nyse: UPW). It is a 2x leveraged ETF, that tracks the Dow Jones US Utility Index. It is comprised of gas, electric, and water utilities, and is non-diversified. Ever since the election, it has seen a 9.8% drop in value due to the administration’s stance on taxing the wealthy. And it’s not just the wealthy, as many of your 401k age-based funds contain a portion of their holdings in the income stock sectors. But that’s another story.
Is it oversold? Will the republicans in congress win some ground on the dividend tax issue? That is yet to be determined, but from a pure technical standpoint, the entire sector is oversold. And playing a leveraged ETF on even a small bounce is a great way to catch a nice 5% pop. Watch the overall markets, and if the S&P breaks through 1425, I would expect to see a nice rally in the Utilities. Watch it carefully, as this ETF is leveraged and can get away from you if the dividend tax law sticks. But I feel that the bulk of the major selling has already taken place, and this is a safe entry point to make a little money here.