Before the federal tax cut legislation was taken to President Bush for his signature Friday, some investors were taking it to the bank.
Utilities, energy firms and financial services firms surged as investors bought stocks with above-average dividend yields.
Under the legislation, the maximum tax on dividend income would drop to 15% from 38.6%. That was expected to make cash dividends far more appealing to many investors.
The tax reform bill “is better for the whole market, but immediately we’re seeing the effect on stocks paying substantial dividends,” said Diane Jaffee, manager of the TCW Galileo Income & Growth stock mutual fund in New York.
Broad market indexes, however, posted just modest gains for the day and lost ground for the week. The Dow industrial average inched up 7.36 points, or 0.1%, to 8,601.38 on Friday. The Standard & Poor’s 500 gained 1.35 points, or 0.1%, to 933.22.
The technology-dominated Nasdaq composite index added 2.54 points, or 0.2%, to 1,510.09.
For the week, the S&P; 500 fell 1.2% and Nasdaq lost 1.9%, snapping five weeks of gains for both. The market took a hit Monday as some investors cashed in profits. The Dow, after three weeks of gains, slipped 0.9% for the week.
The indexes’ small gains Friday belied a broad advance. Winners led losers by 2 to 1 on the New York Stock Exchange and by 7 to 5 on Nasdaq, though trading was the slowest in a month ahead of Monday’s Memorial Day holiday, when U.S. financial markets will be closed.
Leading the way were many electric utility issues, which boast some of the highest dividend yields in the market.
Southern Co., for example, jumped $1.50, or 5%, to $31.25. American Electric Power rose $1.20, or 4.4%, to 28.50, and Dominion Resources was up $1.70, or 2.7%, to $63.99.
At Friday’s closing price, the annualized dividend yield on Southern shares was 4.4%, AEP’s yield was 4.9%, and Dominion’s was 4%. By contrast, the average dividend yield of S&P; 500 stocks is about 1.7%.
Among oil and gas issues, ChevronTexaco rose 98 cents to $68.43, Kerr-McGee gained $1.28 to $47.41, and Equitable Resources jumped $1.44 to $39.77.
Some money managers expressed disappointment that the market couldn’t stage a broader rally. They said investors may be underestimating the overall benefits of the tax plan for the economy and the market.
The maximum tax on capital gains also will decline under the legislation, to 15% from 20%.
“I’m a little surprised the market hasn’t reacted more positively to the news. It’s a real plus for stocks,” said George Mairs, manager of the Mairs & Power Growth fund in St. Paul, Minn.
In other markets Friday, the dollar continued to weaken as the euro rose above $1.18, the highest since its January 1999 launch.
In other highlights:
* Telephone service providers, which have the second-highest dividend yield as a group in the S&P; 500, gained. SBC Communications climbed 95 cents to $25.15, and BellSouth gained 53 cents to $27.03.
* Microsoft rose even though Chief Executive Steve Ballmer said he was selling some of his Microsoft stock to diversify his financial assets. Microsoft edged up 6 cents at $24.22.
Market Roundup, C4-5