4.4%+ High Yield Ex-Dividend Opportunities

by: Paul Zimbardo

After briefly touching Dow 13,000 earlier this month, the market has started to pullback. Do you think that the market rally is overdone? Do you want to lock-in some profits and avoid the intense volatility that we have been witnessing recently? With the economic and political climates only becoming more tumultuous I have been concentrating on high yield opportunities. 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 really 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 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 $500M, 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 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 ≥ 500M
  • P/E Ratio: 0-20
  • Institutional Ownership ≤ 15%

After applying this screen I arrived at the companies/partnerships 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 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.

Consider: Office Equipment Providers

Pitney Bowes (PBI): 8.65% Yield - Ex-Dividend 5/9

Pitney Bowes provides mail processing equipment and integrated mail solutions to diverse businesses worldwide. In general, if a company has any issues with its mail, Pitney likely has the solution. You might know the company from the automated metered stamping machine that is ubiquitous in offices across the country. This type of product is the company's core service but the company has attempted to diversify. Once a company has a Pitney Bowes offering they often work with the company to provide more services.

As you can tell this is a mature, sleepy business that has only average growth prospects but is attractive primarily because of its high yield. PBI has underperformed the S&P by fifteen percent year-to-date but the dividend has helped to mitigate the declines. Things are only worse when examining performance for the last fifty-two weeks as the shares are off nearly 31%.

The negative performance is likely due to fears about congressional changes to USPS but even in this digital age, business mail is not going to disappear anytime soon. Earnings and revenue have been holding relatively steady indicating that fears might be overblown. This company entails above average risk due to its industry but I believe it is at least worth further research due to the combination of high yield and low P/E.

Consider: Electrical Utilities

Exelon Corporation (EXC): 5.41% Yield - Ex-Dividend 5/11
American Electric Power Company (NYSE:AEP): 4.88% Yield - Ex-Dividend 5/8
Entergy Corporation (NYSE:ETR): 5.10% Yield - Ex-Dividend 5/8

This is a crowded week for electrical utilities as five of the twelve screener results were in this industry. I focused on the three largest results - Exelon, American Electric Power, and Entergy - which also happen to have the lowest P/Es. While slight geographical differences exist for regional utilities, the underlying business is essentially the same: a stable, cash-cow business that returns most profits to investors via dividends.

Exelon offers the third highest yield out of all screen results (highest utility) with the second lowest P/E. The company's shares are off by nearly twenty percent in 2012 due to poor earnings associated with the Constellation Energy merger. A deeper look at the companies also reveals that Exelon is growing faster, has higher EBITDA ROE, and a lower dividend payout ratio. It appears to be only a matter of time before the underperformance reverses for Exelon. With that in mind, Exelon does have the merger dragging on its near-term performance so Entergy might make for the better dividend capture play.

Consider: Pharmaceutical Companies

Eli Lilly (LLY): 4.75% Yield - Ex-Dividend 5/11

Eli Lilly is one of the largest pharmaceutical ("pharma") companies in the world with drugs focusing on cancer, men's health, osteoporosis, and many other medical issues. Eli has one of the stronger pipelines in the industry and historically pharma companies have been able to maintain their high payout ratios so the yield appears to be safe. There is an abundance of coverage on Eli Lilly here on Seeking Alpha and the common theme is that Eli is a solid dividing paying company that generates sufficient cash flows.

2012 was predicted to be a difficult year for the company as it lowered guidance due to the patent expiration of Zyprexa but the stock has actually appreciated by 4.5% in the past quarter. Performance was better than expected due to strong sales of Cymbalta, which caused a revision to the previously lowered guidance. Eli Lilly was unsuccessful in its bid for Turkish pharma company Mustafa Nevzat Ilac Sanayii AS which looked like a natural fit to cover some of Eli's weaknesses.

Amgen (NASDAQ:AMGN) is the current frontrunner in that bidding war. I still hold Eli for the very respectable dividend as well as what I consider above average gain prospects over the medium term.

Avoid: Broadcasting & Cable TV

Shaw Communications (SJR): 4.92% Yield - Ex-Dividend 5/11
Cablevision Systems Corporation (CVC): 4.43% Yield - Ex-Dividend 5/9

Shaw Communications engages in diversified entertainment offerings, but focuses primarily on Canadian cable television. Cablevision is another entertainment conglomerate that derives the bulk of its earnings from cable, Internet and telecommunication services provided to customers in the New York region. Cable companies have traditionally been able to distribute sufficient cash flows to investors but the tides are starting to change with the rapidly rising cost of content. Sports programming is a double-edged sword because it is one of the biggest advantages over Internet streaming; however, it is the most expensive for cable companies to over.

Factor in the popularity of internet connected television and other devices and I am not extremely bullish on the traditional entertainment content business model. I do not believe that investors are being adequately compensated for the level of risk assumed and the companies mentioned above offer comparable (or higher) yields for less risk.

The information presented has been summarized below.

Disclosure: I am long LLY, T.