After a year of some of the most sadly entertaining partisan theater ever seen in Washington, health-care reform is very close to becoming law. Democrats look ready to hold a vote as soon as Sunday, which means Monday’s opening bell could signal the beginning of a very different world for investors.
If that’s the case, Cramer said during Mad Money, then they better prepare their portfolios. He expects a sell-off, “maybe even a big one,” if a new health-care bill passes.
Beyond the affect this legislation could have on the economy, as American businesses weigh the resultant costs against hiring new employees, Cramer is also worried about how the health-care win would encourage President Obama to follow through on the rest of his agenda. And part of that agenda includes raising taxes on capital gains and dividends.
This latter point is crucial because Cramer would typically recommend falling back into high-yielding dividend plays in situations such as those unfolding in Washington. He likes them because, up until now, they returned more than Treasurys after taxes. But if the tax rate on dividends increases, then Cramer will be forced to change his strategy.
Change it slightly at least. His solution? Buy stocks not with good yields but with great yields. That will nullify the impact from taxes and allow investors to still collect a generous amount of dividend income.
Cramer also warned of another sell-off later in the year as people lock in their gains before any new tax law could take effect. Not to mention, the lower-yielding names would be dumped in favor of those with bigger payouts, putting still more pressure on the market as a whole.
The strategy then is to consider raising some cash on Friday and slowly redeploying it in the five diversified names listed below. But don’t put the money to work too quickly. Cramer’s charitable trust is moving in increments, choosing instead to see how things play out in Washington.
BP : The stock yields 5.8%, but Cramer likes the expected cost cuts and the growth, which comes thanks to last week’s purchase of Devon Energy’s Brazilian and Gulf of Mexico properties.
DuPont : What was once a play on housing, and even pharma, is now an investment in emerging markets, Cramer said. DD yields 4.4% and the company has paid 422 consecutive dividends. Cramer fully expects that trend to continue. Click here for more on DuPont.
Kinder Morgan Energy Partners : This natural-gas pipeline play isn’t exposed to the commodity’s prices, which is why Cramer likes it so much. Well, that and the 6.5% dividend yield.
Verizon Communications : Cramer wanted a utility in his basket of Obama-proof stocks, and therefore gave the nod to telco. He thinks there’s a good chance VZ will boost its dividend, which should boost the 6.3% yield, too.
Eli Lilly : This company has increased its dividend for 42 straight years, and Cramer doubted that health-care reform would prevent a 43rd. LLY yields 5.4%.
All together these five stocks offer an average yield of 5.7%. If that’s not enough, then investors might consider Altria and its 6.8% payout instead of DuPont. That bumps up the basket’s average return to 6.2%, which is a sizable number even in the face of higher taxes.
Now, Cramer doesn’t think these stocks will be able to withstand a wholesale sell-off if investors see 2011 as the year that profit taxes go through the roof.
“But at least you’ll have the edge on the guys who don’t attempt to immunize themselves” from health-care reform, he said.
Cramer’s charitable trust owns Altria and BP.
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