Let me begin by wishing everyone reading this blog a very happy and prosperous New Year!
I’ve been very pleased with the initial interest and response to this blog. In the first week, there have been nearly 50 individual visits to this site. I hope you find it interesting, and that as I move forward, it will stimulate some discussion about dividend investing. Feel free to post comments, critiques and questions.
Please keep in mind that I am not a licensed professional for investments, and that the strategy I am employing, and the trades in the stocks that I discuss is based on my own research. They are not intended to be recommendations for anyone else. Each person should do their own “due diligence” when it comes to making investment decisions, since each person’s needs and risk tolerance levels are unique.
I thought I should start each week’s entry with a recap of what I am holding, an update of what has happened since the last posting, and then a forward looking view of the stocks that I am watching and may plan to purchase over the next few weeks that have approaching ex-dividend dates.
Background
I embarked upon this strategy a few months ago, as I am attempting to shift to a more conservative posture as retirement is no longer a long term objective for me. I recently turned 57, and with the prospect of retirement looming on the horizon, I have made a conscious effort to scale back on higher risk investments, simply because the timeframe to make up for mistakes is decreasing.
For the past few months I have traded in and out of several stocks that have consistently paid a dividend that is significantly greater than the interest rates that are currently available at banks and credit unions on savings accounts and certificates of deposit. For now, I am setting the threshold of an annual yield above 3%. This may change over time, and if I raise or lower it, I will post it here. For the time being, the US Government is keeping interest rates very low, so the yields of some stocks are attractive when compared to the alternatives available by placing money in banks, in my opinion.
Methodology and Approach
The selections that I make are based on a variety of attributes about the companies. As I mentioned above, the 3% annual yield is the first test. Other attributes I examine include each company’s annual sales and earnings growth rates, the price / earnings ratios, free cash flow, 52 week range for the stock price, average daily volume of shares traded, etc. Admittedly, it is “part art and part science”, but I am attempting to make the selection process more quantitative and “rules based” as I proceed to remove as much emotion from the buying decision process as possible.
I start buying a stock up to 4 weeks ahead of the approaching ex-dividend date, and continue to purchase shares based on several factors, depending on the amount of cash that I have available in my retirement account, and by examining the list of other companies that are also approaching their ex-dividend dates over the next 4 to 8 weeks. I limit the total amount of investment for these stocks to a predefined percentage of the total amount that I have allocated to this strategy, so that no single stock can cause a long term effect on the strategy. The reason for this is simple – diversification. If there is one thing I have learned over the course of my life is that the “unthinkable” can happen when it comes to the economy, financial markets, and individual companies. I could dedicate an entire discussion to the events that I have witnessed and been affected by in my lifetime that I never imagined could have occurred. The lesson learned is that diversification helps to mitigate these risks.
After the ex-dividend date has passed, my goal is to sell the stock as soon as possible, once the price of the stock (minus commissions and fees) provides a profit. Brokerage firms have greatly reduced the price associated with commissions and fees in my lifetime, and you can now trade in and out of a stock without much thought to these expenses. The brokerage firm I am using charges a flat fee of $7.95 per trade, and also offers a number of value added services and research tools that are worthwhile for me. I know that there are other firms that charge less, but the marginal savings are not worth it to me at this time, when I consider the need to learn a new platform for research and other services.
Current Holdings
As I mentioned, I started this strategy a few months ago. Some of the stocks that I have purchased since then have not crossed above the price where I purchased them, so I continue to hold them. Below are the stocks I am holding, and my breakeven point for each one, as well as the dividend that has been captured.
Avg Current
Stock Company Purchase Share Dividend
Symbol Name Price Price (12/31) Captured / share
BKCC Blackrock Kelso $11.62 $11.18 $0.32
HNZ Heinz $50.36 $49.42 $0.45
PCG PG&E $48.22 $47.75 $0.455
As I have mentioned, part of this strategy is being comfortable with holding any stock that is purchased until it is profitable to sell it. All of the companies listed above are trading within what I consider a “normal” range. None has had any news or announcements that would lead me to believe that the decline in price is abnormal, or a reversal in the long term upward trend that each has exhibited. I will continue to hold them, if necessary, until the next ex-dividend date, since, in my opinion, they are all solid companies and well run enterprises, with good to excellent long term business prospects.
Many people “buy and hold” stocks like these for years, as they are comfortable collecting the long term dividend each quarter. My approach is slightly different – I simply rotate among stocks each quarter with the exclusive goal of capturing the dividend, but will hold the stock if the price declines. I believe that by doing this, the result will be a better return than the “buy and hold” strategy. Only time will tell if I am successful.
Recently Closed Positions
I successfully closed (sold) 3 positions that I had opened (purchased) after capturing the dividends in December. They were:
Profit
Stock Company Per Days Dividend
Symbol Name Share Held Captured / share
BCE Bell Canada Enterp. $0.67 10 $0.455
CINF Cincinnati Financial $0.18 8 $0.400
RAI Reynolds & Reynolds $0.06 14 $0.490
The price for each of these 3 stocks held up well shortly after their respective ex-dividend dates. The sale of these stocks provided funds to purchase shares of the next companies on my list that are approaching their ex-dividend dates. As previously discussed, I normally expect a drop in the per share price when a stock goes ex-dividend, because in theory, the cash that is obligated to be paid reduces the value of the company as the funds that are returned to the shareholders decreases the value of the company.
There have been other situations where I had to wait much longer for the stock price to regain its price following the payment of the dividend. In one instance, I had to wait about a month to sell shares in DuPont as it remained below the price where I purchased it. Patience is frequently required with this strategy, but as long as the companies that are selected are sound, and there is no compelling news that would cause a change in the long term outlook for the company, I “stay the course” and wait it out.
Recent Purchases
Below is the list of current holdings, which have approaching ex-dividend dates
Share Per Share
Stock Company Breakeven Current Dividend
Symbol Name Point Price Expected
(Ex-Date) (12/31)
T (1/6/11) AT&T $29.24 $29.38 $0.42
VZ (1/6/11) Verizon $34.84 $35.78 $0.4875
BMY (1/5/11) Bristol Meyers $26.49 $26.48 $0.33
I was hoping to add some shares to each of these over the past week, but they all remained above the purchase point that I had established for additional shares. The good news is that they all held up well over the past week. The bad news is that there weren’t bargains to be had on any of these to capture additional dividends that are about to be paid.
On the Horizon
Looking forward, there are many companies that will be going “Ex-Dividend” over the next 4 weeks. I have narrowed down the list based on my criteria. Many high yielding stocks are typically eliminated in this process, as they don’t fit within my established parameters, which includes an examination of a number of factors. If you are attempting to buy stocks for their dividend yield, you should do your own research and make your own decisions.
Stock Company Current Dividend Ex-Dividend
Symbol Name Price Expected Date
BMO BMO Financial Grp. $57.00 $0.69 01/28/11
CLX Clorox $63.28 $0.55 01/25/11
RY Royal Bank of Canada $52.27 $0.4925 01/24/11
SO Southern Company $38.21 $0.455 01/28/11
Each of the above companies are relatively stable, but growing. The Canadian Banks were not involved in the risky mortgage backed securities investments that precipitated the financial meltdown that was experienced in the US. Both BMO and RY provide dividends that exceed my threshold level, and their stock prices are relatively stable over the past year. I will be watching them closely in early January, and buying shares on any short term dips in price, although both are already below recent highs.
Clorox is one of the most recognized consumer brands in the world, and provides cleaning products as well as other utility items in the consumer market. Sales have increased slowly but steadily over the past couple of years, and the stock price has traded in a fairly narrow range. CLX is currently below a recent high price, and looks attractive to me for this strategy. Similar to all other companies, I would not object to holding shares in Clorox if necessary if the price declined below where I purchase it.
Southern Company is an electric utility company headquartered in Atlanta, GA, serving the needs of business and residential customers in the southeastern US. Due to the growth of the population in this part of the US, Southern Company has generally done very well over the past several years in revenue growth, and profitability, and has paid a dividend consistently. The share price has been steadily increasing in 2010, following a decline in 2009. My feeling on this stock is that it is likely to benefit from an economic recovery, and is very capable of continuing to pay the dividend. I will be watching it for a possible purchase over the next couple of weeks.
There are other stocks that are also approaching ex-dividend dates that were excluded by my screen. If there are stocks you want to bring to my attention, please send me an email, or make a post on this blog and I will try to respond in my next weekly post.
Other Resources
If you are interested in learning more about dividend yielding stocks, there are a variety of resources available. Some of them have placed ads on this blog, and I encourage you to click on them and see the variety of discussions and ideas about this facet of investing strategy.
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