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 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 year-to-date as it indicates reduced downside relative to peers. With the impending European crisis I now pay additional attention to a company's geographical dependency and will avoid companies with significant European exposure if I think the business model is overly reliant on Europe. These criteria are summarized below:
- Dividend Yield ≥ 4.0%
- Ex-Dividend Date = Next Week
- Market Capitalization ≥ $1B
- P/E Ratio: 0-20
- Institutional Ownership ≥ 15%
- Avoidance of European Exposure
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.
Ares Capital Corporation (ARCC): 9.53% Yield - Ex-Dividend 6/13
Ares Capital Corporation is a specialty finance company that provides services to diverse middle-market companies that have unique financing needs. The underserved nature of the business makes this a highly lucrative segment but it is not without risk in this economic climate; however, with a PE under nine I am comfortable with the margin of safety. Please note that ARCC is one of the largest Business Development Companies ("BDC") under the Investment Company Act of 1940. A nice overview of BDC is provided by IndieResearch but the primary point is that BDCs must distribute 90% of their earnings as dividends.
The dividend history is a little volatile but the dividend appears to be safe for at least the near-term. There are signs that ARCC is planning on growing as it has been raising equal capital and expanding its revolving lending facility so the situation requires close monitoring. Barclays recently covered Ares is a dividend company worth following based upon its dividend background
NYSE Euronext (NYX): 4.84% Yield - Ex-Dividend 6/13
NYSE Euronext operates securities exchanges including the New York Stock Exchange (NYSE), NYSE Arca, NYSE Amex, and Euronext N.V. Stock exchanges have been in the news a lot recently as Nasdaq (NDAQ) mishandled the high profile Facebook (FB) IPO. Shares are off nearly ten percent in 2012 which has driven the yield up to nearly five percent but I would avoid NYSE for dividend capturing due to the numerous unpredictable external factors. It remains to be seen if NYSE will pickup any additional business from Nasdaq's debacle but I would not be optimistic. The latest defection for NYSE was that Kraft (KFT) will be moving its company to the Nasdaq.
Shaw Communications (SJR): 4.96% Yield - Ex-Dividend 6/13
Shaw Communications engages in diversified entertainment offerings, but focuses primarily on Canadian cable television. Cable companies have traditionally been able to distribute sufficient cash flows to investors but the tides are starting to change with 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 offer. This is still a 'cash cow' industry but it is changing too quickly for me to fully support investing in it.
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 the companies mentioned above offer comparable (or higher) yields for less risk. Five percent seems to be that magic yield number for this type of utility companies that draws support and that could occur again with Shaw. As is the case with NYX, the yield has only risen because the stock has declined notably in 2012.
NorthWestern Company (NWE): 4.12% Yield - Ex-Dividend 6/13
UIL Holdings Corporation (UIL): 5.03% Yield - Ex-Dividend 6/14
I recently wrote a detailed explanation of how I analyze utility companies 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.
Both NorthWestern and UIL service .7 million customers; however, NorthWestern focuses on Montana, South Dakota, and Nebraska while UIL primarily operates in Connecticut. UIL operates in a more difficult geographic environment and trades a higher PE but has a yield that is ninety basis points higher. From that standpoint UIL would be the risky choice but investors are at least being compensated for that risk.
Garmin (GRMN): 4.38% Yield - Ex-Dividend 6/13
Garmin is a company that specializes in global positioning systems ("GPS") technology, specifically stand-alone GPS receivers for automobiles. I have been bearish on Garmin for quite sometime as I do believe that the valuation works for an industry that faces a steep decline going forward. The dividend is respectable and was just recently increased but I cannot recommend Garmin for either an investment or dividend capture.
Merck & Co, Inc. (MRK): 4.38% Yield - Ex-Dividend 6/13
Merck is one of the largest pharmaceutical/biotechnology companies and is also one of the largest companies in the world with a market capitalization greater than $100B. Merck's core products include Cozaar (reduce risk of strokes), Fosamax (osteoporosis), Hyzaar (hypertension), Singulair (asthma), and Zocor (cholesterol). Both Vatalyst and Investment Underground highlighted Merck for its high quality dividends and overall financial strength. I have been long Merck for over one year as it has one of the better drug pipelines and highly respectable dividend while I wait. The company just had FDA approval of a sarcoma drug delayed pending further testing but that should not have a major impact on the stock.
Altria Group (MO): 5.01% Yield - Ex-Dividend 6/13
Altria is one of the largest tobacco companies with major brands such as Marlboro and Virginia Slims. Tobacco companies make for great investments in all types of economies because tobacco users are always willing to buy the inelastic product. I have invested in both Altria and Philip Morris (PM) with tremendous capital gains and dividends over the years. The legal ruling against strong warning labels on cigarettes should benefit all companies in the industry. Additionally, a proposed tax increase on cigarettes in California was voted down which could be an indication of what would happen in other states if similar proposals are made. Tobacco companies are both mature and safe; precisely what investors are seeking in this economy. For this reason, I hold PM in my "Great Recession II" portfolio.
The information presented has been summarized below. Yellow and red represent "avoid" and "consider" classifications, respectively.
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