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 July 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, PEs 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
- PE Ratio: 0-20
- Institutional Ownership ≥ 15%
- Avoidance of European Exposure
After applying this screen I arrived at the single equity discussed below - Universal Corp. No other public companies 'fit the bill' this week, primarily because holiday weeks are less common for dividend payments. Although I envision this opportunity as a short-term trading idea, 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.
Universal Corp (UVV): 4.23% Yield - Ex-Dividend 7/5
Universal Corporation is the leading leaf tobacco merchant and processor. Universal is much smaller than other tobacco companies such as Philip Morris (PM) but it operates in a different subset of the market. While Philip Morris sells cigarettes and other tobacco products to consumers, Universal focuses on the procurement and processing of tobacco. This submarket is not as attractive as selling to consumers as the dividend is lower and growth opportunities are reduced. Bright spots for UVV are that it is highly liquid and trades a price/free-cash-flow ratio of approximately 10.5.
Tobacco companies are both mature and safe; precisely what investors are seeking in this economy. But I would stick with the larger companies that sell to end consumers. Universal is less than five percent from its 52 week high but has a consensus mean price target of 54.00. The stock has lagged the S&P 500 by nearly seven percent in 2012 which provides some layer of comfort. In closing, Universal has offsetting positives and negatives which make it difficult for me to support it as a pure ex-dividend capture strategy candidate. With the dearth of other suitable candidates this week I suggest enjoying Independence Day and waiting until next week to "park" your cash in a dividend payer.
The information presented has been summarized below. Red represents a stock to "consider."
Disclosure: Author is long PM and T.