High Yield REIT Weekly Ex-Dividend Opportunities

 |  Includes: AGNC, CYS, IVR, POR, TWO
by: Paul Zimbardo

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. This is 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.

American Capital Agency Corp. (NASDAQ:AGNC): 14.89% Yield - Ex-Dividend 6/19

Invesco Mortgage Capital Inc. (NYSE:IVR): 16.88% Yield - Ex-Dividend 6/22

Two Harbor Investment Corp. (NYSE:TWO): 15.05% Yield - Ex-Dividend 6/20

CYS Investments Inc. (NYSE:CYS): 14.11% Yield - Ex-Dividend 6/21

mREIT InfoClick to enlarge

From mreit.com: am

mREIT is a Mortgage REIT ... which is an entity that specializes in investing solely in mortgage products (e.g. purchasing and selling mortgage-backed securities). Like other REITs (Real Estate Investment Trusts), an mREIT can only deal with mortgages and 90% of earnings must be paid out to its investors annually.

Since these companies are required to distribute such a high percent of earnings to investors, the yields are much higher than you find with more traditional companies; however, the stock prices and dividends can both be quite volatile. Not all mREITs are created equal as the mortgages can be for residential, commercial, healthcare or many other underlying purposes.

The four REITs above all have yields in excess of 14% and are going ex-dividend in the next few days so you might think they are no brainer dividend captures, right? As I have said in the past, I do not have a wholesale blessing on this sector because there is still so much uncertainty surrounding real estate and the related political environment. These companies can make for profitable longer-term investments but since this area is not my forte, I cannot recommend them without you doing significant additional research. I am simply reminding investors that these super high yield companies are going ex-dividend this week and to conduct further research.

Out of these four mREITs summarized above I wanted to focus on American Capital Agency Corp. as it is the largest of the group, trades at the lowest forward P/E, and has the most robust cash flows. American Capital is a mREIT that invests in agency securities for which the principal and interest payments are guaranteed by either a U.S. government agency or a U.S. government-sponsored entity. The company focuses on residential pass-through certificates and collateralized mortgage obligation, both of which relate to pools of residential mortgages.

While investors may be scared to see the word mortgage anywhere in their portfolio, AGNC is one of the higher quality mREITs and entails less risk due to its reliance on government/quasi-government backed securities. Major shareholders include BlackRock, Fidelity, Bank of America, UBS, Morgan Stanley, Barclays, and other large financial institutions indicating that you are in good company.

Todd Johnson wrote an excellent article on AGNC that presents a bullish case on the stock. Additionally, I highly suggest reading the company's recent 10K as management's comments provide excellent insight into the condition of the overall economy and mortgage market.

Portland General Electric Company (NYSE:POR): 4.06% Yield - Ex-Dividend 6/21

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.

Portland General Electric Company is a utility company with over 800,000 customers in Oregon. Deutsche Bank recently initiated coverage on POR with a buy and a $27.50 price target. DB directly cited pending rate increase proposals as near-term catalysts which make this an overall solid choice.

The information presented has been summarized below. Yellow and red represent "avoid" and "consider" classifications, respectively.

Ex-Dividend InfoClick to enlarge

Disclosure: Author is long T and may initiate a position in AGNC within the next 72 hours.