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:
- 4 Stocks With 4.2%-Plus Yields Going Ex-Dividend This Week
- 6 High Yield REITs: Which Is Best For 2012?
- 6 Ex-Dividends To Consider; 1 To Avoid This Week
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.
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Disclosure: I am long T.