The current European unrest and impending fiscal cliff have caused extreme market volatility and compelled 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 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 in excess of fifteen 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: Financial Institutions
Royal Bank of Canada (RY): 4.13% Yield - Ex-Dividend 10/23
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. RBC is currently the largest bank in Canada with TDBank (TD) a very close second. Nearly sixty percent of the company's profits come from 'vanilla' Canadian banking services, while less than fifteen percent comes from the more volatile international banking and wealth management segments. Capital and financial health are key topics for banks and RBC passes the test with a Tier 1 capital ratio of 13% and Aa3 stable credit rating from Moody's. Note that S&P has a negative outlook on RBC's debt.
RBC has thus far been flying under the radar as our neighbor to the north but has appreciated over twenty-five percent in the past year. Financial stocks have been quite volatile recently with the European crisis and continued fears about yet another potential global economic slowdown but RBC has only barely outperformed the S&P 500 year-to-date. In the past two weeks RBC announced its intention to repurchase approximately two percent of its outstanding shares, subject to regulatory approval. Although history dictates that companies are poor at timing their own share repurchases, it is rarely negative to see a repurchase even with the stock is trading near a 52-week high. There is always downside risk when buying a stock at its high but the real and perceived safety of Canadian banks makes the Royal Bank of Canada a solid ex-dividend play this week.
The information presented has been summarized below. Yellow and red represent "avoid" and "consider" classifications, respectively.
(click to enlarge)
Disclosure: I am long T.
Additional disclosure: Please refer to profile for disclaimer.