The stock market is continuing to set new mult-year records, and many investors are seeking out high yield equities to generate income with lower risk. 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 April 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 time, but should only be performed on companies that you would be comfortable owning.http://cms.seekingalpha.com/shark/shark_envelope#menu=article_edit#params=type:1,Id:521551,tab:0
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, 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.
Prospect Capital Corporation (PSEC): 11.14% Yield - Ex-Dividend 4/26
Prospect Capital is a specialty finance company that operates primarily in the private equity and specialized investment categories. As with many of the financial service companies in my dividend screens, it seems that PSEC is trading at a depressed multiple solely because it is a financial services company. This hidden treasure can be your gain. Private equity companies are attractive dividend producers, because they often either turn around or improve existing companies, and are able to return excess cash quickly. These can be volatile companies, because their ventures often do fail, but once they have successful investments, they can pay higher than average dividends.
The firm prefers to make small investments ($5-$50M) in small-to-mid size North American companies. Prospect has been very active in financing activities, and has been successful in finding demand for its revolving credit facility. In June 2010, Prospect began distributing dividends monthly rather than quarterly, which accounts for the perceived dividend decrease from $.40 to $.10. The dividend has held steady around $.10 per share since then, but such a high current yield dividend growth is not a requirement.
Early this year Prospect agreed to acquire a specialty finance company, First Tower Corp, in a cash/stock deal valued at approximately $233 million. First, Tower specializes in offering installment loans to consumers for mid-sized consumer purchases. Based upon TTM earnings, the deal would offer a current yield of 21%; therefore, should be an accretive acquisition. This is another case of the rich getting richer, and shareholders should take advantage because the stock is still down 12% in the last year, despite rising 15.5% year-to-date. With a yield hovering over 11% and PE below seven, I am bullish on Prospect Capital's future. Many companies with yields in excess of ten percent can be yield traps, but Prospect has withstood the test of time and also offers capital gains opportunities. Please note that Prospect makes monthly distributions.
Bank of Montreal (BMO): 4.71% Yield - Ex-Dividend 4/27
The Bank of Montreal is a diversified Canadian money center bank. In summary, BMO is similar to the large American banks in its service offerings and presents a different approach to gain financial exposure. I am far from bullish on the financial sector, as earnings have been underwhelming overall. The only large bank that I am comfortable owning is JP Morgan (JPM). In the last quarter, BMO reported a $1.1B first quarter profit, but nearly one third of those profits related to "corporate services" rather than core banking activities. Analysts typically characterize such results as "poor earnings quality," as expectations were met in a nontraditional way. Given this recent disappointment, I would look elsewhere.
Hasbro, Inc. (HAS): 4.02% Yield - Ex-Dividend 4/27
Hasbro is one of the largest toy companies in the world, and produces familiar products such as Monopoly, Battleship, and Transformers. The company is down nearly 20 percent in the last year, even after a 10% gain this quarter. This recent increase is likely driven by the positive summer movie cycle which will drive sales significantly. With Battleship and GI Joe both facing potential blockbuster releases in the upcoming months, there are reasons to be optimistic on this year's prospects. On a longer term basis, Hasbro has inked a deal with Zynga (ZNGA) that allows Hasbro to make physical versions of Zynga's online games and other toys. It is uncertain how much this will impact Hasbro's earnings, but this is exactly the type of idea that the company needs to stay relevant going forward. The company has already adapted many of its current board games to take advantage of digital trends, and management certainly appears to have its strategies going in the right direction. The four percent yield is a bonus on what could be a nice growth story.
Pinnacle West Capital Corporation (PNW): 6.40% Yield (per Yahoo Finance) - Ex-Dividend 4/27
Penn West Petroleum Ltd. (formerly Penn West Energy Trust prior to 2011) engages in acquiring, exploring, developing and the related activities for petroleum and natural gas in various Canadian provinces. Any company that produces crude oil and natural gas is likely to entail above average risk; however, I believe that this sector will reward investors going forward, as the commodity prices should recover. Even if the stock remains flat, you can collect a respectable yield while you wait but there is no indication that the yield will increase in the near future. SA Contributor Davy Bui made a compelling argument why you should sell Pinnacle West, and the stock is down nearly 21% in the last quarter. This steep decline has driven the yield up sharply to 6.4%. Given the above average yield and recent decline in the stock, I think Penn West is at least worth further research.
Alliant Energy Corporation (LNT): 4.14% Yield - Ex-Dividend 4/26
Alliant Energy Corporation is a regulated utility company that produces and distributes energy for 600,000 customers in the Central 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 with tremendous success in the form of both capital gains and income. For further detail on my utility company investing methodology, please consult a detailed article on the topic I wrote earlier this year.
Alliant Energy Chairman and CEO William Harvey retired on March 31st, and Patricia Kampling, COO, replaced Mr. Harvey as Chairman and CEO. This management shift could cause greater than usual volatility for the company in the upcoming months; however, the stock has appreciated only slightly in the last few months. Overall this is a quite average utility company but should be satisfactory for dividend capturing.
El Paso Pipeline Partners, LP (EPB): 6.04% Yield - Ex-Dividend 4/27
El Paso Pipeline is a master limited partnership [MLP] that owns interest in companies that operate thousands of miles of natural gas pipelines spanning the Midwest U.S. and Canada. This is a highly lucrative business considering its low relative risk: El Paso's profits are not overwhelmingly tied to energy prices as the pipeline operators charge for the privilege of using the pipelines. Volume will differ as the underlying resources prices change, but not dramatically. The dividend was recently increased by eleven percent; however, the company was recently downgraded by three separate firms, so the situation is worth monitoring. I am bullish on the pipeline business model, and I think a six percent yield is attractive for El Paso.
Northwest Natural Gas Co. (NWN): 4.03% Yield - Ex-Dividend 4/26
Northwest Natural Gas Co. is a natural gas utility company that services 680,000 customers in Oregon and Washington. Northwest recently reported 2011 earnings per share of $2.39 compared to $2.73 in the previous year. A major reason for the decline related to negative tax changes in Oregon; however, a positive property tax ruling mitigated a portion of the decline. Guidance for the year is within the range of $2.35 to $2.55, indicating that management believes earnings are unlikely to return to 2010 levels. One potential positive factor on the horizon is that Northwest has filed a request for a rate increase that could increase revenues by 6.2 percent. This is Northwest's first request in Oregon in nearly ten years, so the odds of success are higher than average. Dividends4Life presents a balanced analysis overview of the company that presents the pluses and minuses fairly. The yield is below average for the industry and Alliant appears to have less downside than Northwest.
The information presented has been summarized below.
Disclosure: Author is long JPM and T.