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 (T) as an example. AT&T declared a $.44 dividend to shareholders of record on January 10, 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 times 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 the investments. Since this is a high-yield quest I began with a specification of a dividend yield greater than 4 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 $500M, PEs between zero and 20, and institutional holding percentage of at least 10 percent (unless an ADR). While not a precise requirement, I prefer companies that have underperformed the S&P 500 (SPY) in the last 52 weeks as it indicates limited downside relative to peers. This is summarized below:
- Dividend Yield ≥ 4.0%
- Ex-Dividend Date = Next Week
- Market Capitalization ≥ $500M
- PE Ratio: 0-20
- Institutional Ownership ≥ 10% (unless an ADR)
After applying this screen I arrived at five 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.
Main Street Capital Corporation (MAIN): 7.57% Yield - Ex-Dividend 1/18
Main Street Capital is a business development company ("BDC") specializing in equity, equity related, and debt investments in companies with revenue between $10M and $100M. Unlike some private equity firms, Main Street avoids start-up companies or those with "speculative business plans,", instead preferring to "invest in traditional or basic businesses." The company can afford to pay the lofty yield as its mezzanine loans often yield in excess of twelve percent.
The dividend is distributed monthly and has exhibited slight growth since 2008. The portfolio of investments is available here and spans virtually all industries, providing sufficient diversification. The primary consistency is that these companies tend to be located in the Southern United States.
Siemens AG ADR (SI): 4.21% Yield - Ex-Dividend 1/20
Siemens AG an electronics conglomerate that operates primarily in energy, healthcare, industry, and infrastructure markets. The only major segment to lose money was "Equity Investments" which lost 26M Euro due to a 50% ownership stake in Nokia Siemens Networks. I like to call Siemens the German General Electric GE as the company has its hand successfully in numerous markets. This is a well managed company that declined from 130 during the summer of 2011 and has stabilized in the 90-100 range as of late.
One potential concern is the ties to an ailing eurozone; however, those fears are not extremely perturbing. While over 50% of revenue is from sales to customers located in Europe, CIS, Africa, and the Middle East, only 10% is to Germany. Furthermore, the remaining 47% of sales are to Asia and the Americas. With the PE below 10 I think there is a sufficient margin of safety. Siemens distributes earnings annually and the dividend has nearly doubled since 2009 after remaining flat from 2007 to 2009.
Imperial Tobacco Group PLC ADR (ITYBY.PK): 4.22% Yield - Ex-Dividend 1/18
Imperial is the one of the other "big tobacco" companies like Reynolds RAI, that arose in my screen last month. Imperial has brands including Davidoff, Gauloises Blondes, Redline, and Gold Leaf. I have invested in both Altria MO and Philip Morris PM with tremendous capital gains and dividends over the years. Imperial is cheaper and has a lower yield than Altria; therefore, I prefer Altria as a long-term investment but Imperial holds up very well for this strategy.
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.
Eaton Vance Risk Managed Diversified Equity Income Fund (ETJ): 12.03% Yield - Ex-Dividend 1/20
Eaton's Equity Income Fund attempts to do what its name would predict - generate income from equity holdings via dividends and writing calls and puts. This is essentially the strategy that I employ with my personal portfolio so I was quite interested in this fund. Upon closer inspection the fund has not had any prolonged success and is negative overall. Considering that the fund's top holding is Apple AAPL it is quite surprising that the overall fund has performed so poorly in the last three years (negative 3 percent by market price). Mr. Albo of Seeking Alpha wrote a critical article of the fund and I would avoid this fund, at least for dividend capture purchases. Note that the majority of the distributions consist primarily of "return of capital" rather than earnings.
Dorchester Minerals LP (DMLP): 7.80% Yield - Ex-Dividend 1/19
Dorchester Minerals is a limited partnership that engages in the acquisition, ownership, and administration of natural gas and crude oil interests in the United States. I am bullish on natural gas and the overall energy sector in 2012 but as Sol Palha points out, "net income for the past three years is erratic: in 2008, it came in at $66 million; in 2009 it dropped to $21 million; in 2010 it moved up to $34.8 million." Palha continues "for 2011, net income stands at $25 million. If net income for the next quarter matches that of the last quarter, total net income for 2011 could come in at roughly $36.5 million or higher." The distribution is rather volatile and the annual amount has been rather flat for the last three years.
The information presented above has been summarized below.
Disclosure: Author is long MO, PM, and T.