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. The ex-dividend strategy can work in one of two ways: either you buy before the ex-date to receive the dividend or buy afterward 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 me requesting further details on the second strategy. Investopedia has a great example of how this works. To explain, 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 time.
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 4% 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 an 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 this indicates limited downside relative to peers. My screen 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 thirteen 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.
Lockheed Martin Corporation (LMT): 5.31% Yield – Ex-Dividend 11/29
Lockheed Martin is an advanced technology manufacturing company that specializes in defense and other related fields. Lockheed is the company behind the F22 fighter plane as well as anti-missile defense systems. The stock has essentially remained in a tight range between the high 60s and low 80s since the first quarter of 2009 with few signs of improvement. With the super committee’s failure to make a decision, defense spending is facing $600B in cuts, which could spur further downward pressure. The primary reason to invest in Lockheed is the high dividend of 5.3% which was just increased by 33%. Even during the depths of 2008, Lockheed was increasing the dividend. Additionally, the company's commitment to share repurchases confirms management’s commitment to shareholders.
M&T Bank Corporation (MTB): 4.14% Yield – Ex-Dividend 11/29
The Manufacturers and Traders (M&T) Bank is a holding company with $80B in current assets and 780 bank branches across the eastern United States. As I have said about other regional banks in the past, “I suspect that [the regional banks] 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.” M&T Bank has a history of increasing its dividend payments over the years and the dividend appears to be relatively safe. This week over 25% of the screener results are regional banks so I went with the most conservative choice. M&T Bank wins in every safety category: lowest PE, highest institutional ownership, largest market capitalization, and worst performance YTD versus the S&P. As a consequence, M&T also has the lowest yield but I would rather be conservative than chase a few extra basis points of yield.
Lorillard Inc. (LO): 4.79% Yield – Ex-Dividend 11/29
Lorillard is one of the “big tobacco” companies with brands including Newport, Kent, and True. I have invested in both Altria (MO) and Philip Morris (PM) with tremendous capital gains and dividends over the years. Lorillard does not have brands that are as strong but it is a similar investment hypothesis. Furthermore, the legal ruling against strong warning labels on cigarettes should benefit all companies in the industry. Tobacco companies are both mature and safe; precisely what investors are seeking in this economy. For this reason I hold PM in my “Great Recession II” portfolio.
Waste Management, Inc. (WM): 4.49 Yield – Ex-Dividend 11/28
Waste Management specializes in a business that few others want to deal with: waste and garbage. WM offers collection, transfer, recycling, and disposal services for both residential and commercial customers. The business is not just simply picking up garbage and depositing of it in landfills anymore. Now there are high-tech recycling and related operations that are integral to the business and offer WM a competitive advantage over smaller rivals. Aside from Waste Management’s massive fraud in the 1990s, this company has been a steady performer that capitalizes on an unpopular business. Who says you cannot make money from garbage?
Integrys Energy Group, Inc. (TEG): 5.54% Yield – Ex-Dividend 11/28
Integrys Energy is a regulated electric and natural gas utility with 1.7 million customers in the central United States. I have been a fan of electric utilities for years because of their high yields and low risk. I highlighted both Duke Energy (DUK) and Consolidated Edison (ED) last week. It is also worth noting that not all of Integrys’ services provided are regulated.
The information presented above has been summarized below. Click to enlarge: