01/30/11 Update

01/30/11

Past Week’s Activity

This was a busier than usual week for me in the market.  I was able to bank some profits in the dividend portion of the portfolio and also  established a couple of new positions.

The Dow Jones Industrial Average flirted with the 12,000 level earlier in the week, with generally good earnings reports from a few companies contributing to the rise.  I  believe that President Obama’s State of The Union address was viewed positively for business, as he mentioned a plan to decrease corporate tax rates.  Late in the week, however, there were a couple of earnings disappointments which contributed to the decline that was primarily caused by the uncertainty due to the political unrest in Egypt, Tunisia and Yemen.  This caused a  fairly broad selloff on Friday.  Uncertainty over just about anything in the world  can initiate or contribute to these types of declines in markets, and the broad based political situations that are evolving can cause emotional responses that feed upon themselves as markets decline.  Depending on the nature of the crisis, however, one must be alert for opportunities that can arise.  The declines typically result in  an overreaction, and they tend to be are short lived.  Temporary reductions in prices can be viewed as buying opportunities for some stocks.  That said, if the problems in the Middle East get worse, things could get worse if the flow of oil is seriously jeopardized.  If this occurs, I would expect some select oil company and oil services stocks to rise.  Also, if the uncertainty increases, it is likely that demand for gold will increase, since this is the traditional “safe haven”.  Gold prices have risen to all time highs in the past 12 months, but have come down slightly from these highs.  I am not making any recommendations about specific purchases.   Above all else, I hope for peaceful resolutions to the problems in these countries.  It appears that the people in some Middle East countries are seeking fundamental political reforms and demanding improvements that will lead to a better standard of living and democracy.

OK, back to a more “On Topic” discussion:

During the past week, the ex-dividend date for The Royal Bank of Canada passed, and since the stock price was already higher than where it was purchased, I sold it, in compliance with the rules I try to follow under this strategy.  This is another rare and isolated example of being able to sell a stock profitably shortly after securing the dividend.  It provides for an immediate redeployment of the funds for one or more of the next dividend candidate stocks on the watch list.

Although the price continued to move up slightly, time was running out as the ex-dividend date loomed, and I purchased a small position in Paychex (PAYX).  As mentioned last week, I think this company has good business prospects as the economy recovers.  That optimism, coupled with the dividend makes this a good candidate in my opinion.   Time will tell if my instincts are correct about the further appreciation of Paychex.  As you can see in the chart below, it moved lower between the time I purchased it and the end of the week.  I think that this was partially attributable to the ex-dividend date passing, and also in part due to the weakness in the overall stock market on Friday.

You will note a new candidate on the purchased list this week.  It is DuPont (DD), which I have purchased and sold in the past successfully.

It did not appear on the watch list last week, as the share price was above $50.   I generally limit candidates for consideration to a share price of under $50.  DuPont, however, dipped below the $50 threshold mid-week, and I started watching it closely.  I picked up an initial position on Friday, just over $50.  If it falls further, I will be likely to add to my position to reduce the average purchase price while the ex-dividend date approaches.

I was also able to sell the combined position of AT&T and Verizon at a net profit on 1/26.  AT&T reported earnings on 1/27, to a  mixed interpretation by analysts, but a decided drop in the stock.  On the surface they appeared to beat the consensus view for earnings, but it was due to the way that some accounting was done.  Also, there were a few items contained in the earnings report that drove the stock down.  For example, the number of new subscribers on AT&T’s wireless network was lower than expected, which is not a good “leading indicator” for revenue in this category in future quarters.  As the earnings date approached, I wanted to sell it if possible, as I am aware that price fluctuations can and do occur coincident with these announcements.  I was able to sell AT&T and Verizon within an hour of each other on 1/26 at a net profit between the 2 stocks.  This frees up some funds for other opportunities, including Bell Canada Enterprises, which treated me very well last quarter.

Closed positions this past week

Here is a summary of the sales of stocks that I have been holding to capture the dividends:

Stock Symbol	Company Name	Average Purchase Price	Average Sale Price	Dividend Captured Per Share
T and VZ	AT&T and Verizon *	$31.10	$31.26	$0.4300 (T) $0.4875(VZ)
RY	Royal Bank of Canada	$52.17	$53.46	$0.5000

• AT&T and Verizon were treated as one combined transaction.  Twice as many shares of AT&T were purchased as Verizon.  In retrospect, this was a bad decision.  When AT&T was sold, it was at a net loss, but the shares of Verizon were sold at a gain that more than outweighed the loss on AT&T.  Dividends have been captured on both companies, and are due to be paid in on 1/31 and 2/1.
• I will consider both companies next quarter, and continue to monitor news and share prices between now and then.

Current Holdings

Stock Symbol	Company Name	Breakeven Share Price	Current Share Price (01/29)	Dividend Captured
HNZ	Heinz	$50.36	$47.62	$0.4500
PCG	Pacific Gas & Elec.	$48.22	$46.24	$0.4550
SO	Southern Company	$37.97	$37.77	$0.4550
PAYX	Paychex	$33.2659	$31.69	$0.3100*
DD	DuPont	$50.1659	$50.29	$0.4100*

* Ex-dividend date has not yet passed

All of the above except DuPont are below where I purchased them.  There is no company specific news that would lead me to believe that any of these were mistakes, so I will continue to hold them.  Heinz’ next ex-dividend date is 3/20, so I may double my small position on this stock to decrease the average purchase price since it is almost $3 below where I first purchased it. 

On the Horizon

Stock Symbol	Company Name	Closing Price 01/22	Dividend Expected	Ex- Dividend Date
DUK	Duke Energy	$18.16	$0.25	02/09/11
LLY	Eli Lilly	$34.76	$0.48	02/11/11
BCE	Bell Canada Enterprises	$35.62	$0.455	03/13/11est
CNP	CenterPoint Energy	$16.03	$0.1975	02/16/11

With the sale of Royal Bank of Canada, AT&T and Verizon, coupled with a few recent dividends deposited, funds are available for making new purchases, and I am waiting for the right opportunities with the above stocks.  Patience, patience, patience.  There are still a few days to purchase DUK or LLY, and over a month remaining for BCE.  I tired to buy BCE on Friday, but the stock did not decline to my limit price.  Maybe it will execute on Monday.  DUK has been strong recently.  I suspect that the investing community is optimistic about its prospects with its recent acquisition.  I will continue to watch and wait for a decline over the next few days.  If it doesn’t happen, more opportunities will replace it.

I added CenterPoint Energy to the list this week, and will begin to watch this company as a possible candidate.  CenterPoint is another utility company, based in Houston, TX.  CNP has been a fairly stale stock with little price fluctuation, yet generally increasing.  The company announced a slight increase in its quarterly dividend late in January, from $0.1950 to $0.1975 per share.  As the economy recovers, the company could benefit from increased demand from businesses and consumers.  It is the general predictability, historical low volatility, and conservative management that makes this attractive to me.  Oh, and the annual yield translates to about 4.8%.

I’ve added charts for both CenterPoint and Duke Energy below.  Note the similarities:  They are both are below their respective 52 week high prices, but have been trending upward.  As they do so, their stock prices are well above their 200 day moving averages.  Each has a 50 day moving average that is above the 200 day average, and the price itself is above the 50 day average in both cases.  It also appears to me that the 50 day moving average is about to rise.  I see these as generally positive indicators.  Each person considering purchasing either of these stocks should do their own research before making their own decisions.

This may provide an opportunity that is similar to what I did with AT&T and Verizon.  The main difference is that DUK and CNP do not compete for the same customer base.  I may purchase shares in both companies, and treat the transactions like 1 aggregate purchase, so that when the weighted average of the price appreciation in the stocks is above the purchase price, I would sell, after capturing both dividends. 

Closing Comments

Last week I purposely avoided posting the update on Facebook, just to see how many incremental visits I would get without doing so.  It was around 10.  This tells me that there are probably 5 or so “loyal followers” who don’t need to be prompted externally to read my blog regularly at this point.  That’s fine.  My real motivations for creating and maintaining this blog are:

1. It forces me to document my decisions and results in writing – this truly makes me think things through more thoroughly
2. I really want to develop a network of people I can communicate with about investments.  Based on the emails I’ve received, this is beginning to occur.

Comments and questions are always appreciated.

Here comes the disclaimer again:  Remember that I am not a licensed investment professional, and that what is contained in this blog should not be interpreted as investment advice.  It is only a strategy that I am employing personally in an attempt to capture short term dividends on selected stocks.  This blog is simply an attempt to provide dialogue and discussion about this strategy.  Each person’s investment goals and objectives are different, and before making any investment decision, each person should do his or her own research.

Finally, if you enjoy reading this, and if know anyone who might also enjoy this weekly discussion, please feel free to copy and paste the URL for this site and forward it to them in email.

Until next week. . .

Ken