Do you think that the market rally is overdone? 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.
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.
It is true that you can personally avoid taxation by owning the security in a tax deferred account but this serves as a benchmark. 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. 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 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
- P/E 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: Real Estate Investment Trusts
Two Harbors Investment Corp. (TWO): 15.28% Yield - Ex-Dividend 3/22
CYS Investments (CYS): 14.7%% Yield - Ex-Dividend 3/21
I have been utilizing dividend screens to execute dividend capture strategies on high-yield stocks to improve my returns while lowering my risk. More and more frequently I arrive upon financial service companies with extremely high yields , frequently in double digits. The traditional metrics associated with dividend companies may not fully apply to mREITs so a unique analysis is required.
[an] mREIT is a Mortgage REIT ... which is an entity that specializes in investing solely in mortgage products (e.g. purchasing and selling mortgage-backed securities). Like other REITs (Real Estate Investment Trusts), an mREIT can only deal with mortgages and 90% of earnings must be paid out to its investors annually.
Not all mREITs are created equal as the mortgages can be for residential, commercial, healthcare or many other underlying purposes. Since these companies are required to distribute such a high percent of earnings to investors, the yields are much higher than you find with more traditional companies; however, the stock prices and dividends can both be quite volatile.
The four REITs above all have yields in excess of 12% and are going ex-dividend in the next few days so you might think they are no brainer dividend captures, right? As I have said in the past, I do not have a wholesale blessing on this sector because there is still so much uncertainty surrounding real estate and the related political environment. These companies can make for profitable longer-term investments but since this area is not my forte, I cannot recommend them. I am simply reminding investors that these super high yield companies are going ex-dividend this week and to conduct further research.
Sempra Energy (SRE): 4.09% Yield - Ex-Dividend 3/22
Portland General Electric Company (POR): 4.26% Yield - Ex-Dividend 3/22
Sempra Energy is an energy services holding company with underlying natural gas utilities that predominately service 24.4 million customers across California. Sempra has 31 million total subscribers making it one of the largest domestic companies in the United States. Portland General Electric is an electrical utility with less than 900,000 customers in the western United States.
Utility companies were the best performing sector in 2011 with fifteen percent returns as investors looked for a safe haven from the global economic turmoil. I have been investing in high yielding utilities such as Consolidated Edison (ED) for years for both income and capital appreciation. I wrote an in-depth article on electrical utility dividends last week that should provide further color on the topic. I generally focus on earnings quality and geography to obtain insight into the companies for further research.
The fact that Sempra is one of the largest utility companies means that even small increases in rates can flow almost directly to the bottom line due to economies of scale. On the other hand, Portland is a much smaller rival and has less potential for growth. When in doubt I prefer to go with the larger rival in the utilities space so I prefer Sempra.
The information presented has been summarized below.
right click to enlarge
Disclosure: Author is long ED and T.