Whether it's golf or baseball, you know when you hit the ball in just the right spot. Well, the same could be said for dividend investors especially when it comes to giant conglomerates like General Electric (GE) and Johnson & Johnson (JNJ) at their current stock prices. Both of which are currently trading in their dividend sweet spots based on share price, dividend yield and opportunity for capital appreciation (52-week trading range).
A stock hits its dividend sweet spot when the difference between its current share price and 52-week high equate to two-times the current dividend yield. It's a very basic dividend strategy that can provide some discipline when it comes to buying, and more importantly, selling a stock. With this approach, there are no profound fundamental or technical analysis to support it, just good old common sense and rationale that investors can easily share with their family or friends when talking investment shop.
Here's The Sweet Spot Math
At $63 per share, JNJ will produce a 3.6% annual dividend. Payment is currently $0.57 per share with its next dividend payment expected in June. Currently, JNJ has a 52-week trading rate of approximately $59 - $68 a share and is down more than 2% YTD.
The price difference between its 52-week high and current price is $5 or 7.3%. This, of course, is at least double its current dividend yield of 3.6%. Therefore, if you bought JNJ at $63 and it traded back to its 52 week high of $68 in less than two years, selling it at that level would essentially net you a homegrown dividend equivalent to holding it for two years.
There are going to be trading fees and taxes that investors need to consider, but in general investors should grasp the basic idea. And I do believe its basic but also unique because instead of using a fundamental indicator like Fair Market Value, we are using a trading range that it has reached within the last year (benefit here is at least two popular sites have a higher FMV than $68 for JNJ). That being said, it's also important to consider what if it doesn't just run back up to $68 a share and instead stays at or below where investors purchase it. Well, in that case, investors would be eligible for a 3.6% yield for holding a company that has a better credit rating than the U.S> and has increased its dividend for the last 43 years, not to mention it manufactures a variety of household products that millions of people use each and every day (Disclosure: I have four kids, three boys and a girl and our house if full of JNJ products).
Some investors may want to take this analysis a step further. Since the stock has been trading down, should investors wait for it to fall further? Financially speaking, when you do the income math, there isn't a huge benefit to hoping it falls further and potentially missing the long-term upside of owning a dividend aristocrat at these levels. For example, waiting for JNJ to hit $61 would increase the yield to roughly 3.73% annually, but that would only put $13 more in your pocket per year (assuming a $10,000 initial investment).
- At $63: $10,000 X 3.60% = $360
- At $61: $10,000 X 3.73% = $373 = +13
The same can be said for another major conglomerate, General Electric. With it currently trading just a hair above $19 a share, a 52-week high of $21, and a dividend yield of $3.55%, the opportunity for capital appreciation or homegrown dividend, is double its current annual yield. Once again, with several major finance sites valuing it well above those levels.
If you wanted to wait for GE to dip down another 5% or $1.00 you'd only be locking in an additional $20.00 per annum on income alone. And while I'd argue that we are due for at least a 3-5% broader market correction, that's a pretty steep decline for this particular stock considering it's already down 5% from its March highs.
While I'm not aware of a Pulitzer or Nobel prize for common sense investing strategies, dividend sweet spots can position investors for both yield and long-term capital appreciation while adding some buy and sell discipline at the same time. After all, if in-depth technical or fundamental analysis were always right, we wouldn't need other approaches like these. Here's to keeping things simple.
Additional disclosure: The above article has been written utilizing data from publicly available sources, which are believed to be reliable, and is provided for informational and educational purposes only. Investors should consider their personal situation and become intimately familiar with any investment, including its prospectus, before investing. Past performance and current yields are no guarantee of future results.