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DISCLAIMER: Each article or comment written by this author is intended as general information only, and is not intended to provide specific advice, or due diligence to be relied on. As such, the information presented in any article or comment does not consider any reader’s personal investment... More
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  • How To Generate Weekly Income With Dividends 1 comment
    Jan 4, 2013 9:03 PM | about stocks: T

    Historically low interest rates have caused investors to seek higher yielding opportunities. Stocks with high yields provide current income and a cushion against capital depreciation. Dividend stocks tend to have strong financial positions to support the periodic payments. I have been utilizing a dividend capturing technique for the past few years in an attempt to generate income as well as identify undervalued dividend stocks.

    I have been utilizing a dividend capturing technique for the past few years in an attempt to generate income as well as identify undervalued dividend stocks. There are hundreds of viable equities going ex-dividend every week and savvy investors can identify situations in which they buy a stock, receive the dividend, and profit on the transaction. This dividend strategy generally works 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 equities can be attractive longer-term investments depending on your individual circumstances.

    Buying the stock to receive the dividend is intuitive but the second strategy may not be as familiar. Investopedia has a great example of how this strategy works. To explain this, I will use AT&T (T) as an example. AT&T declared a $0.45 dividend to shareholders of record on April 10, 2013. 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 $0.38 = [$0.45 * (1-.15)]. If AT&T declined by more than $0.38 in the absence of negative news you might have an attractive opportunity. One can debate ad nauseum (a) whether to consider the tax rate and (b) what the tax rate should be but 15% is a decent assumption. To be conservative you may ignore 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 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 as the objective is to concentrate on liquid companies that are affordably valued. 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. For example, if negative macro news breaks, the stock that has declined more in the past year should ideally perform better than a similar stock with year-to-date gains. 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 YTD S&P 500 Underperformance
    • Minimal European Exposure

    After applying this screen I arrived at the equities discussed in my weekly dividend article. I generally write at least one ex-dividend article per week with additional articles published to focus on high-yield sectors (notably utilities and REITs). Here is a sample of three of my most popular ex-dividend articles:

    Although I envision these as short-term trading ideas, you still need to exercise caution. The information presented in each respective article 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.

    DISCLAIMER: Each article or comment written by this author is intended as general information only, and is not intended to provide specific advice, or due diligence to be relied on. As such, the information presented in any article or comment does not consider any reader's personal investment objectives or financial situation; therefore, no articles or comments make investment recommendations. The opinions expressed in any articles or comments on this website are my own and do not necessarily reflect the views or opinions of any third party. I am not responsible for actions taken, or not taken based the content of this site.

    Investment strategies or securities mentioned in any article may not be suitable for all investors. The risk of loss in trading securities, including options, and futures can be substantial. Options involve risk and are not suitable for all investors. Please understand all risks associated with investing before investing. Prior to buying or selling an option, a person should read a copy of Characteristics and Risks of Standardized Options (www.optionsclearing.com/about/publicatio...). Options or other transactions could involve complex tax considerations that should be carefully reviewed and considered along with each reader's personal financial situation and all other relevant risk factors prior to entering into any transaction. Probability analysis results are theoretical and in nature, and do not reflect any degree of certainty of an event occurring or not occurring.

    While I believe the information provided in any article or comment is reliable; however, I do not guarantee its accuracy, timelines, or completeness. Financial information changes daily and articles and comments are not updated for subsequent changes in financial position or share prices. Transaction costs (commissions and fees) should be considered before entering trades and not accounted for in analyses presented.

    Past performance referenced in any article or comment is not a guarantee of future performance. You should always consider the risks of investing in the light of your personal circumstances and your due diligence should include consulting with your professional advisor.

    Links to and from websites do not imply any content endorsements. I am not responsible for, nor do I control the content of linked websites which are subject to change without my knowledge or consent.

    Disclosure: I am long T.

    Themes: Dividends, Yield, High-Yield Stocks: T
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  • Hedge Fund of One
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    Comments (14) | Send Message
     
    With the technique of buying ex-div stocks below the dividend decline, how quickly do you find that the ex-div stocks typically recover their pre-dividend price? Also, do some stocks tend to recover in predictable patterns?
    25 Feb 2013, 06:11 AM Reply Like
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