ELECTION INCOME WINNERS

	Roger Conrad Utility Forecaster.com
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Income investors have a lot to look forward to in the next four years. Here's why.

No increases in taxes or regulation: Income investors have plenty to celebrate in the aftermath of the Republican victory in the 2004 elections.

With a majority of votes in the presidential race and expanded margins in Congress, George W. Bush arguably has more power than any occupant of the White House since Lyndon B. Johnson in the 1960s. Like LBJ, Bush faces soaring federal deficits that could curtail some of his more aggressive spending plans.

For income investors, however, the key isn't whether some complicated plan for total tax overhaul passes muster. It's the dividend tax cut passed in 2003 that's now almost certain to be extended well into the future, or even cut further, that matters.

The dividend tax cut for the first time put dividend income on a higher plane than speculative, short-term profits, and on an equal level with long-term capital gains. Finally, investors who stuck with their stocks were rewarded with a lower tax rate than those who simply bought and sold.

When it was passed, the dividend tax cut was slated to phase out by 2008. As a result, it was viewed as temporary and the underlying share prices of advantaged securities never rose to reflect the gain. That should change with a vengeance in the coming months as the cuts are extended.

Stocks that pay dividends will be rewarded with higher valuations, which in turn will further encourage corporations to push along more of their profits in dividends.

We've already seen this with many companies, particularly in the utility sector. And the more companies pay out in dividend, the more honest they'll have to be with their accounting. After all, cash is one thing an accountant can't manufacture on a balance sheet.

Tax Cut Treasure

Winners from the dividend cut extension include virtually all common stocks in the Income Portfolio, as well as Consumers Power Preferred B and the Northrop Grumman Convertible. Part of Flaherty Crumrine Preferred Income Fund's dividends are taxed at 15 percent and part as ordinary income.

Dividends on foreign-based companies such as the Growth Portfolio's Hutchison Whampoa, RWE and Bayer are also taxed at a maximum rate of 15 percent. So are Canadian royalty and income trusts Advantage Energy Trust, Bonterra Energy Trust, Great Lakes Hydro Income Fund and Vermilion Energy Trust.

Canadian trusts are treated as qualified corporations in the US, unless they go through the paper work to be considered partnerships or are considered passive entities. Neither applies to these trusts, all of which will get a lift when the preferential rate on dividends is extended as expected.

Bonds-including municipals-limited partnerships, "capital" preferred stocks (like Chelsea Property Preferred) are taxed as ordinary income as are most real estate investment trusts.

Note that a large part of limited partnership income, however, is treated as an untaxed return of capital. TEPPCO Partners' 2003 dividend, for example, was 100 percent return of capital for all those who hadn't exceeded their cost basis. Consequently, its payout is effectively taxed at 15 percent, though not until you sell.

While non-advantaged income investments could lose ground to the advantaged this year, the fixed income picks in the Income Portfolio have less credit risk. And as long as you control duration risk as we have, there's little real downside.

Regulation Reprieve

Over the past four years, we've seen a gradual rollback of regulation in many industries, particularly energy and communications. One of the greatest fears on Wall Street prior to the election was that a Kerry administration would reverse that trend for everything from air pollution and global warming to financial services and health care.

Now that we're headed for four more years of less oversight, several industries are already heaving a sigh of relief, particularly coal-burning utilities.

In the last days of the Clinton administration, the Environmental Protection Agency filed a series of lawsuits against utes not complying with the 1990 Clean Air Act. Those will remain buried for the next four years, as they were the prior four. So will concerns about global warming and climate change, potentially saving the defendants billions of dollars.

Two winners are Income Portfolio picks Southern Company, which owns one of the largest fleets of coal plants in the nation and NiSource, which operates a number of older units in upstate Indiana.

The regulatory reprieve gives both the time to make needed adjustments without great financial risk. Both are also beneficiaries of the dividend tax cut. Buy Southern up to 30; NiSource to 21.

Nuclear power also scored big from the Bush victory. As a senator, Kerry had a long record of opposing nukes, both on economic and security grounds.

In contrast, Bush has pushed for extending the licenses of currently operating nukes, financing a new generation of nuclear plants, as well as backing final approval of Yucca Mountain, Nev., the proposed but controversial site that would house much of the country's current and future radioactive waste.

His win ensures more of the same. That's a big plus for Southern Company and Dominion Resources, which is the nation's second largest owner of unregulated nuclear capacity.

The oil and gas sector is one of Bush's original backers. And the administration attempted to repay its generosity by pushing for passage of a comprehensive energy bill in its first term. Those efforts were thwarted by opponents of drilling in the Arctic National Wildlife Refuge and later by House Republicans, who wouldn't pass a bill without legal protections for makers of harmful gas additive MTBE.

With the defeat of Senator Tom Daschle (D-ND) and the retirement of several other senior Democrats, the vote on both of these issues may be closer in the next Congress. But if the bill's price tag approaches that of the prior bill-dubbed "rancid pork" by Senator John McCain (R-AZ)-it will face equally determined opposition.

The good news is sector stocks haven't really risen to reflect prospects for passage, so there's little risk to betting on success now. Should the Public Utility Holding Company Act at last be repealed, NiSource's already strong takeover appeal would rise further.

Greater flexibility on oil and gas drilling will help BP, ChevronTexaco and Dominion Resources. BP has a large stake in Alaska that would win from more drilling there. Dominion Resources, BP and ChevronTexaco are buys at current prices.

Communications continues to emerge as a duopoly between well-capitalized regional bells and cable companies, with a handful of smaller players carving out niche markets. That trend won't change in a second Bush administration, though Federal Communications Commission chief Michael Powell is rumored to be stepping down.

The first order of business is the final demise of unbundled network elements platform pricing (UNE-P), the system now struck down by the courts requiring owners of networks to rent them at discounted rates to competitors. The Powell FCC has also passed a directive that prohibits states from regulating Voice over Internet Protocol, which will allow big tel to dominate it.

The Powell vision of less regulation will especially benefit Income pick Verizon Communications. The stock is a buy up to 42 for those who don't already own it.

Roger Conrad will be available to take your questions until Monday, November 29. Please use the form below to submit your questions.