6% Yield Ex-Dividend Opportunities To Consider

Includes: BTE, EPB, KIM, MLP, RY, SNH
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 (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 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.

Royal Bank of Canada (RY): 4.34% Yield - Ex-Dividend 7/24

The Royal Bank of Canada ("RBC") is one of the world's largest diversified banks with services ranging from commercial banking to investment banking to wealth management. Over half of the company's profits come from vanilla Canadian banking services, while less than twenty percent comes from the more volatile international banking and wealth management segments. RBC has thus far been flying under the radar as our neighbor to the north and is down "only" 8.6% this year. Financial stocks have been quite volatile recently with the European crisis and continued fears about yet another potential global economic slowdown. With three other recommended candidates below that all yield over six percent, I would avoid the Royal Bank of Canada this week.

El Paso Pipeline Partners, LP (EPB): 6.21% Yield - Ex-Dividend 7/27

El Paso Pipeline is a master limited partnership ((NYSE:MLP)) that owns interest in companies that operate thousands of miles of natural gas pipelines spanning the Midwest U.S. and Canada. This is a highly lucrative business considering its low relative risk: El Paso's profits are not overwhelmingly reliant on energy prices as the pipeline operators simply charge for the use of the pipelines. Volume will differ as the underlying resources prices change, but not dramatically. The dividend was recently increased by another fifteen percent and the yield continues to creep materially above six percent.

Note that since I last wrote about EPB, Kinder Morgan (NYSE:KIM) completed its acquisition of El Paso Corporation. Tim Plaehn has a nice write-up on the implications and comes to the conclusion that "it appears the El Paso Pipeline Partners assets mostly complement the pipelines and facilities owned by Kinder Morgan Energy Partners" and that "investors looking for new money MLP investment ideas should probably wait for some more information from Kinder Morgan." I am bullish on the pipeline business model, and I think a six percent yield is attractive for El Paso as the distributable cash flow continues to exhibit growth.

Senior Housing Properties Trust (NYSE:SNH): 6.59% Yield - Ex-Dividend 7/24

Senior Housing Properties Trust is a healthcare REIT (real estate investment trust) that owns 369 properties across 38 states with a clear concentration in the Eastern United States. The property portfolio includes:

  • 249 Senior living communities with nearly 30,000 beds
  • 2 Rehabilitation hospitals
  • 108 Properties leased to medical related businesses
  • 10 Wellness Centers

The 6.6% yield is the highest yield this week; however, is in-line with yield of other healthcare REITs and significant lags that of mortgage REITs (mREITs). The dividend has risen approximately 25% since 2000 indicating that future dividend growth is unlikely for this trust. The PE is slightly on the high side but this is at least an average dividend capture candidate.

Last week SNH sold $350M of 5.625% 2042 bonds in an offering that was increased from the originally planned $100M. Note that REITs generally must distribute annually at least 90% of its taxable income to its shareholders in exchange for generally not having federal income tax liabilities.

Baytex Energy Corp. (NYSE:BTE): 6.07% Yield - Ex-Dividend 7/27

Baytex Energy is an oil and gas company that engages in the acquisition, development, and production of oil and natural gas in Western Canadian and is expanding its presence in the United States. Despite its natural gas interests, more than 75% of revenue is derived from heavy oil with light oil accounting for nearly twenty percent. Todd Johnson has a very comprehensive overview of Baytex in which he concludes "I believe Baytex is a long term winner in the Canadian monthly dividend oil sector. I prefer the company's focus upon internal funding and monthly dividends."

Baytex recently closed the offering of its 2022 6.625% debentures and sent notice of redemption for its 2016 9.15% debentures. As a Canadian publicly listed corporation there may be special tax considerations for United States shareholders depending on their unique situations. Note that Baytex pays dividends monthly and that payment has remained constant at $.22 per month throughout 2012.

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

click to enlarge

Disclosure: I am long T.

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