The year 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 to mitigate risk. 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 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 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 immediate taxation by owning the security in an account with beneficial tax treatment, 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 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 4% 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 $1 billion, PEs between zero and 20, and institutional holding percentage of at least 15% (except ADRs). While not a precise requirement, I prefer companies that have underperformed the S&P 500 year-to-date as it indicates reduced 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 ≥ 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 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: Oil & Well Services
SeaDrill Limited (SDRL): 9.12% Yield -Ex-Dividend 5/22
SeaDrill is an offshore drilling company that operates over fifty oil and gas drilling platforms across the world. The high yield was initially concerning, so I dug deeper (no pun intended) into the company as the oil and gas drilling industry can be somewhat volatile. The dividend history is short, but indicates a steady trend with a commitment to returning excess funds to shareholders.
The first quarter 2012 financials also reiterate a bullish stance on the dividend that management has been repeating virtually every quarter:
in light of the continued increase in demand for such units we see further growth opportunities in our markets…At current daily rates these new investments as well as the new builds ordered last quarter will significantly enhance both our future earnings and dividend capacity."
This quarter includes a $.15 extraordinary dividend related to the company's investment in SapuraCrest. The company continues to make comments make SeaDrill look like an attractive long-term investment:
in 2012 we have entered into new contracts with a revenue potential of US$1.9 billion, bringing our total order backlog to a new historic high of US$13.8 billion and more importantly with an EBITDA margin of 60%.
The company was recently upgraded by Citi from Neutral to Buy.
Two important situations worth monitoring are the company's financing plans and Master Limited Partnership ("MLP") interests. The company has been gauging demand for an issuance of medium-term debt to finance its aggressive growth plans. Seadrill's board is researching the conversion to a MLP structure which could bring benefits to the financial condition of the firm.
Avoid: Foreign Retail
Giordano International Limited (GRDZF.PK): 5.56% Yield - Ex-Dividend 5/23
Giordano is a high-end Hong Kong retailer. The company's listing has average volume under 1,000 shares and is very thinly traded. Since I could find virtually no information on the stock, it is not a candidate for investing.
Consider: MLP Closed End Funds
Tortoise Energy Infrastructure Corp. (TYG): 5.89% Yield - Ex-Dividend 5/21
Tortoise Energy Infrastructure is a closed-end management company that invests in public traded MLPs. As mentioned above with SeaDrill, MLPs are typically energy companies that engage in the gathering, transportation, processing, and related activities for natural gas, crude, or other refined products. As of February, the fund had a clear preference towards natural gas and crude which comprised nearly 85% of the underlying portfolio. Current top holdings include Enterprise Production Partners, L.P. (EPD) and Magellan Midstream Partners, L.P. (MMP). The dividend rate has inched forward over the years but do not expect growth greater than the low single digits. Selecting TYG may be a less volatile alternative to selecting individual MLP stocks.
Consider: Electrical Utilities
Avista Corp. (AVA): 4.53% Yield - Ex-Dividend 5/22
Great Plains Energy (GXP): 4.24% Yield - Ex-Dividend 5/25
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.
Avista and Great Plains Energy are utility companies that produce energy in the United States and both serve fewer than one million customers. Avista announced first quarter 2012 earnings that declined primarily due to higher operating expenses that have been plaguing the company. Even "strong" quarters for the company generally do not include earnings growth due to expenses rising faster than revenues. New rates have gone into effect for segments of Avista's customers which should hopefully mitigate the decline in earnings going forward.
Great Plains is a compelling pick because it is currently trading below book value with a .91 price-to-book ratio. However, the yield is on the low side given its PE versus the industry. GXP is quite expensive for a utility with a PE in excess of 17. The poor liquidity situation makes GXP even less attractive with .25 and .42 quick and current ratios, respectively. When selecting utility companies, I prefer corporations with larger customer bases than these two. However, most utility companies can be used for dividend capturing. Out of the two companies, I prefer Avista because of the higher yield, lower PE, and better financial condition.
Avoid: Natural Gas Companies
Atmos Energy Corporation (ATO): 4.17% Yield - Ex-Dividend 5/23
Atmos Energy Corporation engages in the distribution, transmission, and storage of natural gas in the United States. The financial performance of these companies is not strictly tied to the price of natural gas but the two are not completely unlinked. As expected, natural gas prices impact demand for Atmos services to some degree. Natural gas inventories are quite elevated and have continued to trend lower despite being near historical lows. Prices have ticked upward in the past month but are still very low by historical standards. I am generally bullish on natural gas but the near-term prospects are not favorable. While these could be interesting long-term investments, I would avoid for dividend capture purposes.
The information presented has been summarized below. Yellow and red represent "avoid" and "consider" classifications, respectively.
Click to enlarge:
Disclosure: Author is long T.
Disclosure: I am long T.