The 2012 European situation has caused extreme market volatility and has forced investors to seek safer stocks. With the economic and political climates becoming more tumultuous, I have been concentrating on high-yield opportunities. Blue-chip dividend companies are well known, but there are attractive equities with high yields 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 strategy, these equities 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 $0.44 dividend to shareholders of record on October 10, 2012. On the ex-dividend date, the stock price should decline by the after-tax dividend amount, with an assumed tax rate of 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 $0.37 = [$0.44 * (1-.15)]. If AT&T declined by more than $0.37 in the absence of negative news, you might have an attractive opportunity. For the sake of added conservatism, you may consider ignoring the tax aspects and only trade if the stock price declines by the full dividend amount. Executing this strategy can generate returns over short periods of time 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, as the objective is to concentrate on liquid companies that are affordably priced. I began with a specification of a dividend yield greater than 4 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 in excess of 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 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%
- Ideally Modest S&P 500 Underperformance
- 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 decision. 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.
Consider: Biotechnology and Drug Companies
Bristol-Myers Squibb (BMY): 4.02% Yield - Ex-Dividend 10/3
Bristol Myers Squibb ("Bristol") is one of the largest pharmaceutical/biotechnology companies with a market capitalization greater than $55B although it is significantly smaller than its rivals Pfizer (PFE) and Merck (MRK). Bristol sneaks on to the screen with a yield that is marginally above four Bristol's major products include Abilify Plavix, Reyataz, and Sustiva, which generated over 60 percent of Bristol's $21.2B in earnings last year. Bristol has one of the better investor relations websites and you can easily compare product sales year-over-year going back to 2007. When it comes to pharmaceutical companies one of the most important factors is the pipeline quality.
The dividend payment was flat for 2001 to 2007 but has been steadily increasing by a few percent per year; a nice perk but nothing notable. The stock is down nearly 17 percent this year but I think that is overdone for a historically stable stock. With the uncertainty surrounding the Amylin (AMLN) acquisition and the suspension of a troublesome hepatitis C drug, the stock could be poised to rebound. The stock has fallen 6 percent in the last quarter largely on the issues related to the hepatitis C drug so Bristol may have a modest rebound ahead.
Avoid: High-Yield Funds
Alliance Bernstein Income Fund Inc. (ACG): 5.55% Yield - Ex-Dividend 10/3
This closed-end fund offering from Alliance Bernstein has the objective of generating high current income to outperform the broader bond market with a side objective of preservation of capital. This a very popular market segment recently and the fund has appreciated more than 8 percent this year. The fund's portfolio is available here and there are no unexpected holdings. 56% of holdings are government securities with nearly 70% of the portfolio rated triple A so you may be wondering how the robust 5.5% yield is achieved. The answer is primarily leverage: the fund has 46% leverage which boost the returns. The use of leverage in this low interest rate environment may be prudent but this is a red flag for dividend capturing as the trade could very easily turn against you. The fund charges sixty five basis points which is somewhat expensive for an income-oriented fund. Despite offering a significantly lower yield, I prefer Bristol Myers for dividend capture this week due to its relative safety and future growth prospects.
The information presented has been summarized below. Yellow and red represent "avoid" and "consider" classifications, respectively.
(click to enlarge)
Disclosure: I am long T.