Do you think that the market rally is overdone? Is it time to flee to safety? With the economic and political climates only becoming more tumultuous I have been concentrating on high yield equities. We all know about the blue-chip dividend companies but there are attractive companies 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.
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 $.44 dividend to shareholders of record on January 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 taxation by owning the security in a tax deferred account 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 outsized 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 25 percent. While not a precise requirement, I prefer companies that have underperformed the S&P 500 in the last 52 weeks as it indicates limited downside relative to peers. This is summarized below:
- Dividend Yield ≥ 4.0%
- Ex-Dividend Date = Next Week
- Market Capitalization ≥ $1B
- P/E Ratio: 0-20
- Institutional Ownership ≥ 10%
After applying this screen I arrived at the companies discussed below. Although I envision these as short-term trading ideas, you still need to be careful. The information presented below should simply be a starting point for further research and should not be taken as a recommendation. 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.
Avoid: Mortgage Real Estate Investment Trusts
MFA Financial, Inc. (MFA): 12.75% Yield - Ex-Dividend 4/2
I have been utilizing dividend screens to executive dividend capture strategies on high-yield stocks to improve my returns while lowering my risk. More and more frequently I arrive upon financial service companies with extremely high yields, frequently in double digits. The traditional metrics associated with dividend companies may not fully apply to mREITs so a unique analysis is required.
From mreit.com: an
mREIT is a Mortgage REIT ... which is an entity that specializes in investing solely in mortgage products (e.g. purchasing and selling mortgage-backed securities). Like other REITs (Real Estate Investment Trusts), an mREIT can only deal with mortgages and 90% of earnings must be paid out to its investors annually.
Not all mREITs are created equal as the mortgages can be for residential, commercial, healthcare or many other underlying purposes. Since these companies are required to distribute such a high percent of earnings to investors, the yields are much higher than you find with more traditional companies; however, the stock prices and dividends can both be quite volatile.
As I have said in the past, I do not have a wholesale blessing on this sector because there is still much uncertainty surrounding real estate and the related political environment. mREITS can make for profitable longer-term investments but since this area is not my forte, I cannot recommend them for dividend capture strategies.
I am simply reminding investors that these super high yield companies are going ex-dividend this week and to conduct further research. Since I last looked into MFA in December the yield was nearly 14% but it has slipped over one percent as the stock has appreciated over eleven percent in the last quarter. For further details please consult Sol Palha's detailed financial breakdown of the company.
Consider: Tobacco Companies
Universal Corporation (UVV): 4.19% Yield - Ex-Dividend 4/4
Universal Corporation is the leading leaf tobacco merchant and processor. Universal is much smaller than other tobacco companies such as Philip Morris (PM) but it operates in a different subset of the market. While Philip Morris sells cigarettes and other tobacco products to consumers, Universal focuses on the procurement and processing of tobacco. This subsection is not as attractive as selling to consumers as the dividend is lower and growth opportunities are lower.
Tobacco companies are both mature and safe; precisely what investors are seeking in this economy. But I would stick with the larger companies that sell to end users.
Consider: Biotechnology and Drug Companies
Bristol Myers Squibb (BMY): 4.05% Yield - Ex-Dividend 4/3
Bristol Myers Squibb ("Bristol") is one of the largest pharmaceutical/biotechnology companies with a market capitalization greater than $50B although it is significantly smaller than its rivals Pfizer (PFE) and Merck (MRK). Bristol's major products include Abilify Plavix, Reyataz, and Sustiva, which generated over sixty percent of Bristol's $21.2B in earnings last year. Bristol has one of the better investor relation 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 fifteen percent this year but I think that is overdone for a relatively stable stock. There is uncertainty surrounding Bristol's potential acquisition of Amylin (AMLN) that could be pressuring Bristol but this is a stable company that should rebound.
The information presented has been summarized below.