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 (NYSE: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, 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%
- Minimal 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.
ConocoPhilips (NYSE:COP): 4.89% Yield - Ex-Dividend 7/19
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 (NYSE:PSX) which will focus on downstream operations with COP shareholders receiving one share of PSX for each two shares of COP owned. Philips 66 surged nearly six percent on Friday when Warren Buffett announced that Berkshire (NYSE:BRK.A) was buying PSX at the expense of COP. Mr. Buffett famously apologized for his investment in ConocoPhilips as it lagged most of his other picks in recent years.
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 at six, the forward P/E is nearly nine. As Cramer mentions, you can purchase Chevron (NYSE:CVX) with a slightly lower forward P/E and greater growth potential. While Chevron's yield is approximately 140 basis points lower, Conoco's PEG is 10.1 versus Chevron's positive 7.3.
Overall, I agree with Mr. Buffett and think ConocoPhillips is a very average company with offsetting positives and negatives. Chevron misses my screener criteria by sixty 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. Chevron recently had its 'A' Buy Rating reaffirmed by TheStreet.
Targa Resources Partners LP (NYSE:NGLS): 6.73% Yield - Ex-Dividend 7/19
Targa is one of the largest providers of midstream natural gas and natural gas liquids in the United States. Targa focuses on southern states where its supply of natural gas supplies is considered relatively stable which acts to dampen supply shocks. Ron Hiram has a nice summary of Targa's recent financial performance that is a quality primer for those considering an investment.
As you can see from the above chart of Natural Gas prices, the commodity has faced pricing pressure for at least two years. There has been a rally in natural gas prices that has seen the commodity rise 45% in the past quarter but it is still far away from returning to even the $4 per MMBtu. Ordinarily I would consider NGLS a positive ex-dividend candidate but given its high PE of nearly 17 I recommend exercising restraint - I think this name has more room to decline.
Note that Targa Resource Corp. (NYSE:TRGP) is a separate publicly traded partnership that owns general and limited partnership interests such as incentive distribution rates that entitle the partnership to receive 48% of all cash distributions of NGLS.
The information presented has been summarized below. Yellow and red represent "avoid" and "consider" classifications, respectively.