Is it time to flee to safety? With the economic and political climates only becoming more tumultuous I have been paying closer attention to dividend stocks recently. We all know about the blue chip dividend companies but there are attractive companies with high yields that are going ex-dividend every week. This strategy can work in one of two ways: either you buy before the ex-date to receive the dividend or buy after if the stock declines far below the after-tax amount of the dividend.
Buying the stock to receive the dividend is intuitive but many have contacted be requesting further details on the second strategy. Investopedia has a great example of how this works. To explain this, I will use AT&T (T) as an example. AT&T declared a $.43 dividend to shareholders of record on October 10th, 2011. On the ex-dividend date the stock price should decline by the after-tax dividend amount, with an assumed tax rate of approximately 15% because many dividends qualify for a lower tax rate. As a result, an investor would expect the stock price to decline by $.37 = [$.43 * (1-.15)]. If AT&T declined by more than $.37 in the absence of negative news you might have an attractive opportunity on your hands. Executing this strategy can generate outsized returns over short periods of times.
To focus on these opportunities I ran a screen with a focus on relative safety for the investments. Since this is a high yield quest I began with a specification of a dividend yield greater than four percent and an ex-dividend date within the next week. To provide some layer of safety I narrowed down the environment by looking at companies with market capitalizations greater than one billion, PEs between zero and twenty, and institutional holding percentage of at least twenty-five percent. While not a precise requirement, I prefer companies that have underperformed the S&P 500 year-to-date as it indicates limited downside relative to peers. This is summarized below:
- Dividend Yield ≥ 4.0%
- Ex-Dividend Date = Next Week
- Market Capitalization ≥ $1B
- PE Ratio: 0-20
- Institutional Ownership ≥ 25%
After applying this screen I arrived at four potential trades. Although I envision these as short-term trading ideas, you still need to be careful. The information presented below should simply be a starting point for further research.
RadioShack Corporation (RSH): 4.15% Yield – Ex-Dividend 11/22
RadioShack is a midsized national technology products retailer that has been narrowing its focus on more “cutting edge” technologies such as cell phones and tablets. RadioShack has historically specialized in a wider range of more obscure technology and the shift towards the mainstream has been a wise one. Despite attempts at rebranding and more aggressive promotions the stock has significantly underperformed the S&P 500 year-to-date, hopefully indicating limited downside. “The Shack” appears to be relatively well positioned with attractive Black Friday sales so the stock could be buoyed by any overall retail strength.
FirstMerit Corporation (FMER): 4.48% Yield – Ex-Dividend 11/23
FirstMerit is the bank holding company for FirstMerit Bank, a retail bank located in Ohio and Pennsylvannia. With 160 bank branches in only two states FirstMerit is certainly a minor player in the financial services industry; however, the high yield and low PE make the company worth a second look. Regional banks largely have fared better than their larger peers because they were less aggressive with offering subprime loans. As I have said about other regional banks in the past, “I suspect that it is being punished just like other financials, despite having a very sleepy business model compared to underwriting, trading, and the like. Essentially, this is a bank in the traditional sense of the word, and offers a robust dividend to compensate patient investors.” FMER has also seen a string of positive analyst upgrades, most recently UBS initiating coverage with a Buy rating earlier this month.
Sun Life Financial Inc (SLF): 7.18% Yield – Ex-Dividend 11/21
Sun Life specializes in providing global insurance ranging from life to health to retirement. With extreme uncertainty surrounding Obamacare this is one area of the stock market that you need to be very careful with. The company has been thoroughly beaten down and trails the S&P 500 by nearly 33% year-to-date. In contrast the FirstMerit, Sun Life has been downgraded twice on November 4th and I would personally avoid this company. The dividend is high but this appears to be a classic yield trap.
Great Plains Energy Incorporated (GXP): 4.08% Yield – Ex-Dividend 11/25
Great Plains Energy is a nearly one million customer utility company that operates in Missouri and eastern Kansas. The company has been in the news recently because presidential candidate Herman Cain served on the board of a company that was acquired by Great Plains. This might make for an interesting political story but it is irrelevant to a trade decision because this is an old story that is only surfacing because of Cain’s potential to secure the GOP nomination. Ignore the noise and see Great Plains for what it is: a defensive company that pays a respectable dividend. I do believe that there are more attractive utility companies with higher yields and lower PEs, such as Duke Energy (DUK) so this may not be the most attractive trading opportunity.
The information presented above has been summarized below.
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Disclosure: I am long T.