Ex-Dividend Opportunities For The End Of June

by: Paul Zimbardo

2012 has been quite volatile for the broad stock market and the European situation is further threatening equity investments. With the economic and political climates only becoming more tumultuous I have been concentrating on high yield opportunities to mitigate risk. 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 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 April 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 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 $.37 = [$.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 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 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 pay additional attention to a company's geographical dependency and will 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%
  • Avoidance of 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 be 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 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.

Avoid: Real Estate Investment Trusts

  • Chimera Investment Corporation (NYSE:CIM): 14.29% Yield - Ex-Dividend 6/27
  • Hatteras Financial Corp. (NYSE:HTS): 12.38% Yield - Ex-Dividend 6/27
  • Capstead Mortgage Corporation (NYSE:CMO): 11.41% Yield - Ex-Dividend 6/27
  • Starwood Property Trust, Inc. (NYSE:STWD): 8.33% Yield - Ex-Dividend 6/27
  • National Health Investors, Inc. (NYSE:NHI): 5.18% Yield - Ex-Dividend 6/27

My high-yield screens are increasingly uncovering 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. 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.

Not all mREITs are created equal as the mortgages can be for residential, commercial, healthcare or many other underlying purposes. Note that National Health Investors is a healthcare REIT "that specializes in the financing of health care real estate by first mortgage and by purchase and leaseback transactions" so in theory it is less speculative than other mREITS.

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.

With the exception of NHI, the five REITs above all have yields in excess of eight percent and are going ex-dividend in the next few days so you might think they are no brainer dividend captures, right? As I have said in the past, I do not have a wholesale blessing on this sector because there is considerable uncertainty surrounding real estate and the related political environment. These companies can make for profitable longer-term investments but since this area is not my forte, I cannot recommend them without you doing significant additional research.

I am simply reminding investors that these super high yield companies are going ex-dividend this week and to conduct further research. As I mentioned last week I can only recommend that you focus on Hatteras and Capstead because they invest in agency securities; therefore, the principal and interest payments are guaranteed by either a U.S. government agency or a U.S. government-sponsored entity.

Consider: Private Equity

Prospect Capital Corporation (PSEC): 10.74% Yield - Ex-Dividend 6/27

Prospect Capital is a specialty finance company that operates primarily in the private equity and specialized investment categories. As with many of the companies that appear in my dividend screens it appears that PSEC is depressed solely because it is a financial services company. This hidden treasure can be your gain. Private equity companies are attractive dividend producers because they often either turnaround or improve existing companies and are able to return excess cash quickly. These can be volatile companies because their ventures often do fail but once they have successful investments, they can pay higher than average dividends. The firm prefers to make small investments ($5-$50M) in small-to-mid size North American companies. In June 2010 Prospect began distributing dividends monthly rather than quarterly which accounts for the perceived significant dividend decrease from $.40 to $.10. The dividend has held steady around $.10 per share since then but with such a high current yield dividend growth is not a requirement.

I am confident in the company's immediate term prospects primarily because the company announced a $100M repurchase plan in August. Earlier this year Prospect agreed to acquire a specialty finance company, First Tower Corp, in a cash/stock deal valued at approximately $233 million. First Tower specializes in offering installment loans to consumers for mid-sized consumer purchases. Based upon TTM earnings, the deal would offer a current yield of 21%; therefore, should be an accretive acquisition. This is another case of the rich getting richer and shareholders should take advantage. The company continues to exploit attractive investment opportunities and I see no signs of their success ending in the near future.

PSEC has rallied recently and is up over 15% year-to-date, which has driven the yield down by a full percent. At $11.30 the stock is a mere one percent from its 52-week high. Despite this strong appreciation, the P/E is still below ten and the yield just shy of eleven percent; therefore, I am bullish on Prospect Capital's future. Many companies with yields in excess of ten percent can be yield traps, but Prospect has withstood the test of time and also offers capital gains opportunities.

Avoid: Oil and Gas Operators
Penn West Petroleum Ltd (PWE): 8.25% Yield - Ex-Dividend 6/27

Penn West Petroleum Ltd. (formerly Penn West Energy Trust prior to 2011) engages in acquiring, exploring, developing and the related activities for petroleum and natural gas in various Canadian provinces. Any company that produces crude oil and natural gas is likely to entail above average risk and this is no exception. The stock is one of the biggest losers in 2012 and is down nearly forty percent in the past three months alone. Since I last covered PWE the yield has surged from 5.33% to 8.25% as a result of the share price deterioration. This might still make for an attractive longer term investment as the fundamentals have not changed dramatically but I cannot recommend that you try to catch a falling knife with a dividend capture strategy.

The information presented has been summarized below. Yellow and red represent "avoid" and "consider" classifications, respectively.

Disclosure: I am long PSEC, T.