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. 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. This article presents some possible strategies that you should evaluate relative to your own particular financial goals and in connection with your own due diligence.
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 $1B, PEs between zero and 20, and institutional holding percentage of at least 25 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
- PE Ratio: 0-20
- Institutional Ownership ≥ 10%
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. My goal is to present new companies to you and provide a brief overview of their recent developments and this should not be considered a substitute for your own due diligence.
Avoid: Regional Banks
Park National Corporation (PRK): 5.22% Yield - Ex-Dividend 2/22
Park ("Park") National is a bank holding company that offers commercial and retail banking services primarily in Ohio. Over the past year net income has increased nearly 50%; however, net interest income has not experienced much growth. I am not bullish on companies operating in this geographical region. This past week Park sold a subsidiary bank, Vision Bank, for $27.9M. The dividend has held relatively steady since early 2005 and there are no signals that the dividend will grow tremendously in the near future with the payout ratio at 73. This is a thinly traded security (3M average volume of 41K) that has a low market cap and is not covered by most of the large Wall Street firms. For these reason this company can be extremely volatile and would not make the best candidate for a dividend capture strategy.
Consider: Electrical Utilities
Avista Corp (AVA): 4.54% Yield - Ex-Dividend 2/22
Great Plains Energy (GXP): 4.05% Yield - Ex-Dividend 2/24
Avista and Great Plains Energy are utility companies that produce energy in the United States and both serve fewer than one million customers. Avista announced stable 2011 earnings last week as costs grew at the same rate as revenues. New rates have gone into effect for segments of Avista's customers which should hopefully reverse the decline in earnings. Great Plains is a compelling pick because it is currently trading below book value; however, the yield is on the low side given its PE in the industry. Great Plains reports earnings on Monday so I would avoid any trades until the earnings related volatility settles.
Avoid: Natural Gas Companies
Atmos Energy Corporation (ATO): 4.36% Yield - Ex-Dividend 2/23
Atmos Energy Corporation engages in the distribution, transmission, and storage of natural gas in the United States. The financial performance of these companies is not strictly tied to the price of natural gas but it is only natural that natural gas prices impact demand for their services. Natural gas inventories are quite elevated and natural gas prices recently hit a ten year low. I am generally bullish on natural gas but the near-term prospects are not favorable. While these could be interesting long-term investments, I would avoid for dividend capture purposes. Atmos reaffirmed 2012 guidance earlier this month.
Consider: Personal & Household Good Producers
Avon Products (AVP): 4.69% Yield - Ex-Dividend 2/22
Avon Products manufactures and markets beauty and related products to a diverse set of consumers. I always look favorably upon companies with strong brands as the competitive advantages protect it from competitors to a degree. One risk for Avon that is troubling surrounds the Foreign Corrupt Practices Act alleged violations that date back to 2010. While significant time has passed, these are damaging allegations that are difficult to shake and cause investors to lose confidence.
Avon has been battered as of late and has lost 32% of its value over the last fiscal year. With the solid 4.7% yield and average PE for the consumer products space. Barrons has an excellent overview of the company's recent performance. In essence Barrons predicts that Avon's expectations will decline substantially and the company should be able to surpass a low bar.
The information presented above has been summarized below.
Disclosure: Author is long T.