Is it time to flee to safety? With the economic and political climates only becoming more tumultuous I have been concentrating on high yield equities 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 me requesting further details on the second strategy. Investopedia has a great example of how this works. To explain this, I will use AT&T (NYSE:T) as an example.
AT&T declared a $.44 dividend to shareholders of record on January 10th, 2012. 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 preferential tax rate. As a result, an investor would expect the stock price to decline by $.37 = ($.44 * (1-.15)). If AT&T declined by more than $.37 in the absence of negative news you might have an attractive opportunity. Executing this strategy can generate outsized returns over short periods of time but should only be performed on companies that you would be comfortable owning.
To focus on these opportunities I ran a screen with a focus on relative safety for 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 $1 billion, PEs between zero and 20, and institutional holding percentage of at least 25%. 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 and should not be taken as a recommendation.
Enerplus Corp (ERF): 8.37% Yield - Ex-Dividend 1/6/12
I previously wrote about Enerplus last month (note that Enerplus distributes earnings monthly rather than quarterly) and not much has changed fundamentally for the company. Since then the share price has declined slightly which results in the corresponding fourteen basis point rise in yield and dip in PE.
Enerplus is an oil and gas producer with real estate in both Canada and Northern United States. Forbes provides a brief analysis of the company: "The company has hedged most of its 2012 oil production at over $95/bl. and some of the 2013 production at over $100/bl. If natural gas prices can resist weakening further, the dividend should be OK." Additionally, Enerplus was recently highlighted by Bullmarket.com as a top dividend stock for 2012.
AT&T (T): 5.82% Yield - Ex-Dividend 1/6/12
Verizon (NYSE:VZ): 4.99% Yield - Ex-Dividend 1/6/12
This week we have the two largest telecommunication companies both going ex-dividend and they are remarkably similar enterprises. Prior to this year the real differentiating factor was that AT&T had exclusive access to the Apple (NASDAQ:AAPL) iPhone but now all of the major careers can sell the iPhone. As an interesting aside, by the end of 2012/early 2013 Apple's cash and marketable securities will equal Verizon's $115B market capitalization. Of course it is extremely unlikely that such an acquisition would occur as it makes minimal sense but Steve Jobs and Apple have always wanted to have their own network to control the entire user experience.
AT&T is slightly cheaper on a PE basis than Verizon but offers a 16% higher dividend. Verizon outperformed AT&T in 2011 by approximately 9%. As for AT&T, the outperformance truly emerged in August as the AT&T/T-Mobile merger deal began to fade. There is no reason why you cannot own both companies for diversification purposes but I personally prefer AT&T due to the lofty dividend and lower PE. It is certainly unique when you can find a low risk 6% yield, but that is the case with AT&T.
Universal Corporation (NYSE:UVV): 4.26% Yield - Ex-Dividend 1/5/12
Universal Corporation is the leading leaf tobacco merchant and processor. Universal is much smaller than other tobacco companies such as Philip Morris (NYSE:PM) but it operates in a different subset of the market. While Philip Morris sells cigarettes and other tobacco products to consumers, Universal focuses on the procurement and processing of tobacco. This subsection is not as attractive as selling to consumers as the dividend is lower and growth opportunities are lower.
Tobacco companies are both mature and safe, precisely what investors are seeking in this economy. But I would stick with the larger companies that sell to end users.
The information presented above has been summarized below.
Click to enlarge