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4.2%+ High Yield Ex-Dividend Opportunities

2012 has been quite volatile for the broad stock market and the European situation is further threatening equity investments. 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 $1B, 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 reduced 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 ≥ 15%

After applying this screen I arrived at the equities discussed below. Although I envision these as short-term trading ideas, you still need to be exercise caution. The information presented below should simply be a starting point for further research in consultation with your professional financial advisor before you make any investment decisions. 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.

Consider: Energy Companies
ConocoPhillips (COP): 4.93% Yield - Ex-Dividend 5/17

ConocoPhillips is one of the largest independent exploration and production companies with a clear concentration in natural gas. ConocoPhillips recently completed the spinoff of Philips 66 (PSX) which will focus on downstream operations with COP shareholders receiving one share of PSX for each two shares of COP owned.

ConocoPhillips production is concentrated in North America with the remaining approximate forty percent in Europe, Asia, and the Middle East. Cramer provides a solid overview of the two companies in which he ultimately concludes that "now that ConocoPhillips has broken itself up, I think the opportunity here has come to an end." While the current P/E is below six, the forward P/E is nearly eight. As Cramer mentions, you can purchase Chevron (CVX) with the same forward P/E and greater potential growth. While Chevron's yield is significantly lower, Conoco's PEG is negative 5.3 versus Chevron's positive 1.5.

Overall, I think ConocoPhillips is a very average company with offsetting positives and negatives. Chevron misses my screener criteria by fifty basis points of yield but I have profitably owned the stock for years (it is also one of five companies in my Great Recession II portfolio) and I would prefer Chevron over ConocoPhillips.

Avoid: Office Supply Companies
Deluxe Corporation (DLX): 4.19% Yield - Ex-Dividend 5/17

Deluxe Corporation is an office services company that specializes in producing checks. The company has three business unit service lines: small business solutions, financial services (business checking), and checks unlimited (personal checking). The story behind checking is predictably grim according to the 2011 10K: from 2007 to 2010 checks declined from 35% of all non-cash payments to 25% and the trend is expected to continue as more payments shift online.

Deluxe is a mature business that is trying to adapt to the digital world with mixed success. One red flag is that the both revenues and the dividend have been declining. Companies typically consider the dividend payments sacrosanct and loathe reducing the payments unless there is no alternative. The dividend was slashed from $.40 to $.25 in 2006 and it has held steady at that rate. Financial performance have improved slightly over the past two years as declines in the checking segment have been offset by strong growth in marketing solutions and other services. Deluxe appears to be committed to being less reliant on its cash cow operations as evidenced by its annual ~$10 million restructuring chargers per year from 2009 to 2011. I do believe that the company's performance will improve but the 4.2% yield does not adequately compensate for the risk assumed.

Avoid: Broadcasting & Cable TV
Cablevision Systems Corporation (CVC): 4.43% Yield - Ex-Dividend 5/9*

*NOTE: I covered Cablevision last week and the company decided to revise the record date from May 11 to May 17. The payment date remains June 1.

Cablevision is an entertainment conglomerate that derives the bulk of its earnings from cable, Internet and telecommunication services provided to customers in the New York region. Cable companies have traditionally been able to distribute sufficient cash flows to investors but the tides are starting to shift due to the rapidly rising cost of content. Sports programming is a double-edged sword because it is one of the biggest advantages over Internet streaming; however, it is the most expensive for cable companies to over.

There is still a debate as to the impact of cord cutting right now but this is a trend that is not going to dissipate in the near future. Factor in the popularity of internet connected television and other devices and I am not extremely bullish on the traditional entertainment content business model. I do not believe that investors are being adequately compensated for the level of risk assumed and other dividend companies offer comparable (or higher) yields for less risk.

Consider: Electric Utilities
CenterPoint Energy (CNP): 4.00% Yield - Ex-Dividend 5/14
- 5 Million Customers in Texas
Hawaiian Electric Industries (HE): 4.68% Yield - Ex-Dividend 5/17
- 1 Million Customers in Hawaii
Consolidated Edison (ED): 4.05% Yield - Ex-Dividend 5/14
- 5 Million Customers in New York
Duke Energy Corporation (DUK): 4.60% Yield - Ex-Dividend 5/16
- 4 Million Customers in Carolinas and Midwest United States

I wrote a detailed explanation of how I analyze utility companies in March and in brief I focus on the number of customers and geographic location. Larger companies enjoy scale benefits and are able to profit more from smaller rate increases. While 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 and share repurchases.

Hawaiian Electric Industries is unique in that it completely monopolizes the state of Hawaii. The company and its subsidiaries service 95% of the state's population (all islands except of Kauai). Further distinguishing HEI is that the company operates a bank (American Savings Bank) which was responsible for nearly half of the company's income in 2011. 52% of the company's loans are for residential 1-4 family homes and total loans have been declining steadily since 2007. If you are looking to invest in a traditional utility I would avoid Hawaiian Electric due to its significant financial operations.

I have owned Consolidated Edison ("Con Ed") for years and the yield has declined significantly as the stock price has risen over thirty percent in the last two years. This is still a high quality stock but I believe it has been surpassed by rivals in terms of attractiveness primarily due to its recent share price increase. Revenues decreased in 2011 but the declines were more than offset by lower operating expenses. Con Ed is also in the Great Recession II portfolio mentioned above.

Duke Energy is another utility heavyweight which is poised to become the largest public utility company in the United States if its acquisition of Progress Energy (PGN) is approved. This acquisition would result in over seven million customers and an expanded geographic presence in Florida. Concerns have been raised about the deal's ability to achieve regulatory approval which is one of the reasons why the stock has lagged the S&P 500 in 2012. Duke has made efforts to appease regulators recently but the deal is far from certain due to Federal Energy Regulatory Commission challenges. Duke is a riskier utility because of these concerns but I believe it has the most upside out of the companies listed. If you are looking for a pure utility play with the least risk I would consider Con Ed but Duke Energy offers more long-term upside.

The information presented has been summarized below.

click to enlarge

Source: 7 Ex-Dividend Opportunities To Consider