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 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 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 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 $1B, P/Es 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 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 ≥ $1B
- P/E Ratio: 0-20
- Institutional Ownership ≥ 25%
After applying this screen I arrived at the companies discussed below. 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.
Consider: Electrical Utilities
Entergy Corporation (ETR): 4.79% Yield - Ex-Dividend 2/7
American Electric Power Company (AEP): 4.75% Yield - Ex-Dividend 2/8
CMS Energy Corporation (CMS): 4.36% Yield - Ex-Dividend 2/8
TECO Energy (TE): 4.86% Yield - Ex-Dividend 2/9
These four companies are utility companies that produce energy in the United States. While slight geographical differences exist for regional utilities, the underlying business is essentially the same: a stable, cash-cow business that returns most profits to investors via dividends. I have successfully owned utility companies in the northeast US.
American Electric Power is the largest and has had strong performance in the past 52 weeks but the companies are remarkably similar. CMS and TE are notably more expensive so I would look towards Entergy because it has a preferable mix of size, institutional ownership, and underperformance. Entergy is an electric power production and retail electric distribution company that services over two million customers in the Southern U.S. with a focus on nuclear power. Entergy continues to be one of my preferred utility picks because it is has lagged recently in an industry that has been quite popular.
Enerplus Corp (ERF): 8.99% Yield - Ex-Dividend 2/8
Enerplus is an oil and gas producer with source properties spanning Canada, as well as the Northwest and Northeast United States. I previously wrote about Enerplus in early January (note that Enerplus distributes earnings monthly rather than quarterly) and there has been some important recent news for the company. On January 17 the company announced a new equity issuance in Canada to raise $345M finance a portion of the 2012 capital expenditure program.
The company generates sufficient cash flows from operations so this is not too concerning; however, company's tend to rely on equity when they believe there share price is higher. Since early January the yield has increased over seventy basis points as the share price has declined. While the monthly payment has held constant at Canadian $.18, the US dollar amount can be slightly volatile.
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.
Sunoco Logistics Partners (SXL): 4.54% Yield - Ex-Dividend 2/6
Sunoco Logistics is involved in the business of refined products and crude oil, specifically transporting, storing, purchasing, and selling. I highlighted Sunoco last quarter but avoided it because it had a recent dramatic price increase. This quarter I would avoid Sunoco for any dividend capture strategy for a different reason - the stock will be quite volatile as there was significant management change last week. Current CEO, Chairman, and President, Lynn Elsenhans, announced that he will step down effective March 1 to be replaced by current CFO, Brian MacDonald. Dividend capturing relies on a company's stock relying somewhat predictably so any external volatility generally causes me to avoid the stock for the near-term.
Federated Investors, Inc. (FII): 5.26% Yield - Ex-Dividend 2/6
Federated Investors, Inc. is a global asset management holding company that focuses on international equity, fixed income, alternative, and money market strategies. The financial performance of Federated has been in a downward spiral since 2008 and 2010 was not kind for Federated as both revenue and net income declined. Furthermore, 2011 is not on pace to be much better; based upon the quarterly filings, total revenue will decline further in 2011 to approximately $900M. This poor performance is impacting the critical metric of managed assets as total managed assets slumped by eight percent. Since 2008 total managed assets have fallen $50B.
Aside from a special cash dividend in 2010, the dividend payment has been flat for the past three years. In summary, the five percent dividend is not enough to compensate for the risk of this company.
The information presented above has been summarized below.