After briefly touching Dow 13,000 earlier this month, the market has started to pullback. Do you think that the market rally is overdone? Do you want to lock-in some profits and avoid the intense volatility that we have been witnessing recently? With the economic and political climates only becoming more tumultuous I have been concentrating on high yield opportunities. We all know about the blue-chip dividend companies but there are attractive funds 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. Regardless of your short-term strategies, these funds can really be attractive longer-term investments depending on your individual circumstances.
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 $500M, P/Es between zero and 20, and institutional holding percentage of at least 15 percent (except ADRs). 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 ≥ 500M
- P/E Ratio: 0-20
- Institutional Ownership ≤ 15%
After applying this screen I arrived at the companies/partnerships 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.
Vale ADR (VALE): 4.94% Yield - Ex-Dividend 4/16
Vale is a Brazilian minerals company that specializes in the exploration, production, and sale of basic minerals. In addition, Vale engages in steel making, logistics, and energy conservation. Vale is the second largest mining and metals company but primarily derives revenue from iron mining. Despite being a Brazilian company, over half of revenues relate to Asian interests with another twenty percent deriving from Europe. Vale is still typically considered heavily reliant on Brazilian operations; remember that you are not only subject to the volatility of Vale's stock but your investment is susceptible to the movements of the Brazilian market and underlying factors. Due to this added volatility, Vale might not be the best ex-dividend strategy pick.
The dividend distribution increased dramatically in 2011 after remaining relatively flat from 2008-2010. For further details on Vale please consult Tim Plaehn s article on the company's prospects as well as the global competitive landscape for the industry.
Koninklijke KPN (KKPNY.PK): 11.36% Yield - Ex-Dividend 4/16
KPN is the primary telecommunications and Internet service provider in the Netherlands with mobile offerings across numerous European countries. As of December 31, 2011 KPN had 36.6 million mobile customers and a commanding 40%+ market shares in key Netherland service markets. Telecom companies are typical safe investments but the stock has tumbled seven dollars (over forty percent) in just one year. The reasons why are somewhat apparent. Revenues have been slowly deteriorating since 2009 while EPS have fallen at a more alarming rate. Despite these declines, dividend per share has risen nearly 25% in Euros. The company initiated a new "Back to Growth" strategy in early 2011 and it remains to be seen how effective it will be. Based on the sharp drop in the share price, I consider KPN to be a yield trap that should likely be avoided.
Main Street Capital Corp (MAIN): 6.92% Yield - Ex-Dividend 4/18
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 have yields in excess of twelve percent. Since I last wrote about Main Street in January the stock has surged over 13% which has pushed the yield down from 7.57% to a still respectable 6.92%.
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 come thread is that these companies tend to be located in the Southern United States. An update on the portfolio's significant first quarter is available here.
RWE AG ADR (RWEOY.PK): 5.85% Yield - Ex-Dividend 4/17
RWE is one of the largest electricity and gas companies in Europe with 25 million customers. The company holds leading positions in three major European markets: Germany, the Netherlands, and the United Kingdoms. In the last year net income has tumbled 46% while external revenue was flat as the company is going through a corporate reorganization. CEO Jurgen GroBmann commented that "the coming years will also be difficult for us" and it certainly appears that the worst has not passed for RWE. The yield is respectable; however, I am confident that you can find safer, better performing utility companies in the US that offer similar yields with less risk assumed. Whenever I read the words reorganization or a warning from the CEO about future performance I make a note to stay away for dividend capture purposes.
Dorchester Minerals LP (DMLP): 7.39% Yield - Ex-Dividend 4/19
Dorchester Minerals is a Texas-based limited partnership that owns oil and natural interests located in 25 states. Dorchester 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. Both royalties and net profit interests are up solidly in 2011 and the cash flows continue to improve. Also supporting the partnership's valuation is the fact that future estimated net revenues have been rising in excess of 15%. The fundamentals are strong for Dorchester but the company is still dependent on the price of crude and natural gas so macro research is necessary.
The distribution is rather volatile and the annual amount has been rather flat for the last three years but has slowly ticked up versus last year. In fact the company notes this risk as the first risk in its 10K: "Our cash distributions are highly dependent on oil and natural gas prices, which have historically been very volatile." This unpredictability in dividends can be unsettling to some investors and does not make it the ideal candidate for dividend captures but this is a solid company that is attractive, subject to underlying commodity prices.
The information presented has been summarized below.
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Disclosure: I am long T.