Undervalued Income-Generating Equities: Maximizing After-Tax Total Return in 2025

In 2025, the search for undervalued income-generating equities has gained urgency as investors seek resilience amid macroeconomic uncertainty. While high-growth tech stocks dominate headlines, dividend-paying equities-particularly those trading at discounts to intrinsic value-offer compelling after-tax total return potential. This analysis evaluates three key candidates: Kraft Heinz (KHC), Johnson & Johnson (JNJ), and Verizon (VZ), while addressing the critical but often overlooked role of tax efficiency in portfolio performance.

Kraft Heinz (KHC): A High-Yield Bargain with Caution

Kraft Heinz, trading at a 45% discount to intrinsic value, offers a 5.25% dividend yield, according to Morningstar's list. Despite a challenging 2024 (total return of -12.96%, according to KHC performance), its after-tax income of $2.746 billion in 2024 suggests operational stability per Morningstar's list. For tax-conscious investors, the stock's dividend status is pivotal. Assuming qualified dividend treatment (taxed at 0–20% rates per the capital gains tax rates guide), a single filer in the 15% bracket would retain 85% of dividend income after taxes. However, KHC's capital gains remain negative, limiting overall after-tax returns. Investors must weigh its yield against its recent underperformance and structural challenges in the packaged food sector.

Johnson & Johnson (JNJ): Defensive Dividend Powerhouse

JNJ, a 64-year dividend growth leader, trades at a 3.9% discount to intrinsic value with a 2.8% yield, per Morningstar's list. Its 2024 after-tax income of $14.066 billion and 2025 H1 surge to $22.661 billion, noted by Morningstar, underscore its resilience. For high earners in the 37% ordinary income bracket, JNJ's dividends (likely qualified, per Morningstar's list) would be taxed at 20%, preserving 80% of income. Its diversified healthcare portfolio and strong cash flow coverage, as highlighted by Morningstar, make it a defensive play, particularly in a potential interest rate hike cycle.

Verizon (VZ): Broadband's Tax-Efficient Dividend

Verizon's 6.2% yield, cited by Morningstar's list, and 58.75% year-over-year after-tax income growth in 2025 (Morningstar) position it as a standout. With a payout ratio of 31.8% (KHC performance provides comparable payout data), its dividend appears sustainable. For investors in the 0% tax bracket (income < $48,350 for singles, per the capital gains tax rates guide), VZ's dividends could be entirely tax-free. Even at 15%, after-tax returns remain robust. Its strategic focus on 5G and broadband expansion, noted by Morningstar, adds growth potential, enhancing total return prospects.

Tax Efficiency: The Overlooked Lever

The 2025 tax code reinforces the importance of qualified dividends. For example, a $100,000 dividend from KHC (5.25% yield) would generate $5,250 in income. At 15% tax rates, this becomes $4,462.50 after taxes, versus $3,315 if taxed as ordinary income (37% bracket) according to the capital gains tax rates guide. This 34% difference underscores the value of tax-optimized strategies. Investors should also consider holding periods: KHC's ex-dividend dates (per KHC performance) and JNJ's quarterly schedule (Morningstar's list) require careful timing to qualify for preferential rates.

Conclusion: Balancing Yield and Tax Strategy

While KHC, JNJ, and VZ offer attractive yields and undervaluation, their after-tax returns hinge on tax brackets and dividend qualification. JNJ and VZ emerge as stronger candidates for tax-efficient income, while KHC's appeal is tempered by its capital losses. As Morningstar's Dave Sekera notes, dividend stocks are poised to outperform in 2025 due to their defensive nature. Investors must integrate tax planning into their selection criteria to maximize real returns.