Another week has passed, and it is time for the weekly update from the frozen foothills of the Adirondack Mountains . We continue to experience an “old fashioned” winter here in the northeast – we’ve had 2 measureable snowfalls in the past week (my definition of “measureable” is that I needed to use my snowblower to clear the driveway), and presently there is about a 3 foot ground cover in the Saratoga
Past Week’s Activity
Over the past week, dividends arrived as expected on 2 stocks whose ex-dividend dates passed recently:
I was unable to sell any of the stocks I am currently holding, and did not see any compelling reasons to purchase any of those I am watching just yet, so this was another quiet week. Heinz did move up from its closing price of $48.63 last week, but it remains below the average purchase price. All of the other stocks being held declined slightly from their closes of last week, but none dropped significantly enough to raise any real concern. My weighted average price for AT&T and Verizon is still under water, so I continue to hold both.
Current Holdings
Stock Symbol | Company Name | Breakeven Share Price | Current Share Price (01/22) | Dividend Captured |
HNZ | Heinz | $50.36 | $49.20 | $0.4500 |
PCG | Pacific Gas & Elec. | $48.22 | $46.94 | $0.4550 |
T | AT&T | $29.24 | $28.33 | $0.4300 |
VZ | Verizon | $34.84 | $34.95 | $0.4875 |
SO | Southern Company | $37.97 | $38.25 | $0.4550* |
RY | Royal Bank of | $52.17 | $54.27 | $0.5000 * |
* Ex-dividend date has not yet passed
On the Horizon
Stock Symbol | Company Name | Closing Price 01/22 | Dividend Expected | Ex- Dividend Date |
DUK | Duke Energy | $18.16 | $0.25 | |
LLY | Eli Lilly | $34.76 | $0.48 | |
PAYX | Paychex | $32.60 | $0.31 | |
BCE | $35.62 | $0.455 |
No changes from last week. My funds are somewhat limited presently as I am waiting for some of the currently held stocks to cross above the point where I purchased them. That said, I may purchase a small position in PAYX early this week. PAYX has been rising steadily over the past year. It is diversifying into new areas, such as 401k management, and I think its prospects appear bright as the economy continues to recover.
Stocks Eliminated From Consideration
Last week I mentioned that I might discuss why I don’t pursue some stocks that pay high yielding dividends.
The selection of a stock is based on several factors. I start my process each week by using a filtering tool that is included in the website provided by the brokerage company where I make my trades. This enables me to set up as many preset “screens” as I’d like to have, based on a variety of criteria. I begin by finding companies that have an annual yield that is greater than 3%, and that have an ex-dividend date within the next 60 days. Depending on how many companies are shown at that point, I use additional criteria, such as price per share. I tend to select companies whose shares trade for less than $50. The reason for this is simple: Risk can be spread over more companies if several are purchased. Capital is limited, and if high priced stocks are chosen, they will require a higher percentage of funds available. Since there are usually 30 to 50 stocks initially on the list, limiting the candidates to those that are trading under $50 is not an impediment to finding high quality candidates. I then begin to examine as many as I can. As the weeks pass, I learn about quite a few companies, and am developing a list of possible “repeat purchases” from quarter to quarter. That sad, I do look at each stock individually, even if I have purchased it before, to assure that it has a profile that I consider attractive. I look for steady sales growth, steady to growing gross margins over time, and steady to increasing net profits. I also examine how many analysts are following the company, and what the trend is in terms of "buy" recommendations. Depending on what stocks I presently own, I add others, trying not to put too much money into any single vertical market. As a general rule, I like companies that are the following fields: utilities, telecommunications, pharmaceuticals, some financial institutions, some manufacturing and some that sell consumer goods. The utility and telecommunications companies in particular tend to be fairly predictable in terms of revenue and earnings, and they also tend to trade in a narrow range. I look at the financial statements (mainly the quarterly and annual income statements and balance sheets) and also look for any news that might have an impact on the future prospects for the company or industry. I examine a number of things, such as free cash flow, to get a sense as to whether the current dividend payment is sustainable over time. When a company announces that it is reducing its dividend, the price of its stock usually declines. If you had purchased that stock, you could be left holding shares of that company at a loss for a long time.
The research can be a very time consuming process, but as I examine each company, I take notes for future reference. My goal in this process is to consciously try to find attributes that I don’t like about the company, giving me a reason to cross it off the list for possible purchase before its approaching ex-dividend date.
Here are a couple of examples:
Pfizer (NYSE – Symbol PFE)
Pfizer is a well managed, leading Pharmaceutical company based in the US, that pays a dividend with an annual yield of about 4.3%. I generally like large Pharmaceutical companies, and it is selling for a price per share that is well below my $50 maximum guideline, at just over $18.
Here is what I don’t like about PFE: The ex-dividend date is 02/02, which is one day after they announce their quarterly results 02/01. The timing of the 2 events, in my opinon, introduces an unacceptable level of risk for this particular strategy. In order to capture this company’s dividend, shares need to be purchased ahead of both the earnings announcement and ex-dividend date. Many institutions hold shares in this stock, and there are several analysts who research it and provide their opinions and estimates on a variety of metrics. If the company’s results don’t measure up to the consensus view of analysts for things like quarterly revenues, gross margins, net income, or any of a number of other factors that the company usually discusses on the conference call regarding the results such as the outlook for the coming year, the pipeline of new products, or even the results of a specific product that may be key to the company’s growth, a selloff in the stock can occur. The result is usually a decline in the price of the stock. By the way, I am not inferring that that is going to happen with Pfizer. They may, in fact, report positive news, and the price os the stock may rise. But since my goal with this strategy is to sell the stock at a slight profit shortly after the ex-dividend date passes, the timing of Pfizer’s quarterly earnings announcement and its ex-dividend date simply represent a potential for volatility that I choose not to accept. There are other companies where the probability of an announcement that could affect the price of the stock is not as great. If you read other blogs on dividend stocks, you will see that a lot of people like Pfizer. Again, don’t misunderstand or misinterpret the hypothetical scenario above: To be clear - Pfizer is a great and well run company. I just don’t like it for this particular strategy due to the timing of its earnings announcement and its ex-dividend date.
Compare the timing on Pfizer to another large Pharmaceutical firm, Eli Lilly, that I am watching and considering purchasing. Lilly will announce its quarterly results on 01/27, and it goes ex-dividend on 02/11. The time between these events should allow for any short term volatility to settle from any positive or negative information contained in the company’s quarterly results. By the way, Lilly has a forward annual dividend yield of about 5.6%, compared to Pfizer’s 4.3%, so the return is higher, with less inherent risk for price fluctuations occurring due to the timing of the quarterly results announcement compared to the ex-dividend date.
Here is another example that is perhaps a bit more straightforward:
Cedar Shopping Centers (CDR) appeared on my initial screen list this week. Quite frankly, I had not heard of this company before, but the dividend shows an annual yield of over 6%. I began to look into it, and found that it is a Real Estate Investment Trust that owns retail shopping space in several states, essentially making money by managing properties and collecting rents from retail tenants.
So what’s not to like?
- I first noticed that the price of the stock has declined by about 20% over the past year. This led me to ask “Why?” Upon further examination of the income statement, I learned that CDR has been unprofitable over the past 4 quarters. Now, you might say “but the economy is recovering – this could be a bargain as the retail environment improves”. Although this may be true, for this strategy I look for companies with growing sales and earnings, and generally flat to rising stock prices, so I crossed it off the list.
- If the above isn’t enough of a reason, here is another – the average volume daily volume of shares traded is just over 200,000. I prefer companies for this strategy that trade over 1,000,000 shares per day. When it comes time to sell any stock, a higher average daily volume provides a better opportunity to sell than those with lower average volumes.
My conclusion: Despite the attractive yield, I will not consider buying shares of CDR at this time. I crossed it off the list for now, but will look at it in the future, since the yield is attractive. If their business improves, I might consider it in the future.
That is it for this week. Again, comments and questions are appreciated. If you have any dividend stocks that you are considering, let me know, and I will provide my opinion on them. Please 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 merely 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.
Next week I hope to have time to explore a strategy that I sometimes employ to protect profits on stocks, using Covered Call Options. Between now and then I am considering this for one of the stocks I am holding, and will provide more detail next week.
The number of visits to this site continues to increase, and I noticed that someone in Germany
Please feel free to copy and paste the URL for this site and forward it to anyone you know who might enjoy reading it.
Ken
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