Weekly Update 01/08/11

01/08/11

This past week was relatively quiet when it came to trading activity with the stocks I have been trading and following.

A few things happened:

1. The expected dividend on Blackrock Kelso (BKCC) was paid at $.32 per share.  This company went “ex-dividend” on 01/02.  I have held it since early December, and although it moved up to as high as $11.56, it did not hit my breakeven point of $11.62, so I will continue to hold it and wait.

2. Both Verizon and AT&T passed their ex-dividend dates this week.  AT&T will pay $.43 per share, and Verizon $.4875 per share on 1/31.

The price of both companies were holding up well, but coincident with the ex-dividend date came news that AT&T had reduced the price of the older version of the iPhone to $49.  As you may know, AT&T had negotiated exclusive rights to the iPhone with Apple.  In other words, if you just “had to have” an iPhone, the only network you could use was AT&T’s.  Initially I think this was noteworthy, but over the past couple of years, competing phones from HTC and Research in Motion (i.e. “Blackberry”) have been introduced in the market that can do everything (and more) than the iPhone can do.  Still, Apple has wonderful marketing and continues to have a cult like following for its products, so this exclusive arrangement has some value.  Cutting the price on the older model just as Verizon is about to introduce the availability of the iPhone on their network made analysts who cover the telecommunications industry on Wall Street nervous.  They were concerned that this might be a bad omen for the gross margins of both companies if it signals the initial shot of a price war, so the price per share of both stocks fell, and this happened on the day after the ex-dividend date, when a reduction in price per share is expected anyway. 

To net it out, AT&T is currently slightly below the price where I bought it (it closed at $28.85 per share, and my average purchase price is $29.24). Verizon closed at $35.93, which is above my average purchase price of $34.84.  My personal opinion is that the reaction to the news of a potential price war on the iPhone was overblown and the negative effects on the price per share of both companies will be short lived.  I expect to sell Verizon early this coming week, and will also sell AT&T, assuming it trades above my average price.  I could sell both at their current levels, and declare victory on the average share price between the 2, along with having captured the dividend, but I am going to wait a day or two as I think they both might recover from the effects of the analysts pessimism.

3. Last week’s “Watch List”

One of the companies I noted that was worth watching in last week’s blogs was Clorox.  Unfortunately, the company issued a press release early this week that they were revising their 2011 sales forecast downward, and also planning to take a charge against goodwill associated with their acquisition of the “Burt’s Bees” product line.  Some analysts believe that Clorox overpaid for this business, but Clorox defended their decision based on the current and future expected contribution of the Burt's Bees product line.  The stock fell from its year end closing price of $63.28 to a low of $60.56 on Monday when this news came out.  The volume of shares traded that day exceeded 6.9 million shares, which was about 3 times higher than its normal volume.  The stock continued to trade very heavily for the remainder of the week, and recovered some of the loss on Monday.  It closed the week at $62.05.

For this strategy, I look for companies that have revenues that are at least  stable, and hopefully growing Year over Year, along with stable or improving  gross margins and profits.  On one hand, you could view the drop in share price as having created a temporary bargain, and an increase in the dividend yield.  I, however, opted to cross this one off my list for this quarter, as I don’t like unexpected bad news.  Don’t get me wrong - I still think Clorox is a great brand and well run company – there are simply other opportunities out there that are more attractive, and are a better fit for my criteria with this strategy.  I’ll keep Clorox on the list and see how they are doing in April, as the next ex-dividend date approaches.  By the way, I think it is important to point out that the company did not mention any possibility of  reducing its dividend, and from what I can see, they don’t need to, as their free cash flow can continue to support the current payment.

As a complete aside, if you are amused by how litigious our society has become, click on the link at the bottom of this paragraph.  One of the consumer products marketed by Clorox is “Fresh Scoop” cat litter, and you may have seen the ads on TV that demonstrate their claim that cats prefer to “do their business” in litter boxes filled with this brand compared to other brands, such as Arm & Hammer’s “Super Scoop”.  Church & Dwight, the maker of the competing product marketed by Arm & Hammer is taking exception to these claims, and has filed suit against Clorox.  Only in America could something like this occur.    

http://www.bloomberg.com/news/2011-01-05/church-dwight-sues-clorox-over-ads-showing-cats-rejecting-its-litter.html?cmpid=yhoo

OK, back to reality. . . I did purchase initial positions in shares in 2 of the other companies mentioned last week.  I bought shares in the Royal Bank of Canada (RY) at $52.17, and may to add more if it goes below $51.50 between now and its ex-dividend date on 1/24.

I also purchased an initial position in Southern Company (SO), at $37.96.  SO has traded in a narrow range for a long time, with a slow, steady appreciation in price over the long term, and was trading at a point that was below its recent high of $38.54, which motivated me to make the purchase.  I may add more if the price falls to $37.50 or below over the next week to reduce my average cost, as the ex-dividend date approaches.  Southern Company will pay a dividend of $.455 per share to shareholders as of 1/28.

Current Holdings

Here is an update of the stocks I am holding, and my breakeven point for each one, as well as the dividend that has been captured, or that will be captured.

Stock Symbol	Company Name	Breakeven Share Price	Current Share Price (01/07)	Dividend Captured
BKCC	Blackrock Kelso	$11.62	$11.43	$0.3200
HNZ	Heinz	$50.36	$48.47	$0.4500
PCG	Pacific Gas & Elec.	$48.22	$47.02	$0.4550
SO	Southern Company	$37.97	$38.08	$0.4550*
T	AT&T	$29.24	$28.85	$0.4300 *
VZ	Verizon	$34.84	$35.93	$0.4875 *
RY	Royal Bank of Canada	$52.17	$52.39	$0.5000 *

* Indicates ex-dividend date has not passed yet

Recently Closed Positions

No positions were closed since last week’s posting.

On the Horizon

There are a few companies that I will be watching over the next few weeks, as they are good fits for most of the parameters I have established for capturing  dividends as they are paid.

Stock Symbol	Company Name	Closing Price 01/07	Dividend Expected	Ex- Dividend Date
DUK	Duke Energy	17.79	$0.25	02/09/11
LLY	Eli Lilly	$34.90	$0.48	02/11/11
PAYX	Paychex	$31.87	$0.31	01/28/11

Duke Energy is a conservatively managed power generation and distribution company, operating in several states, including North and South Carolina, Ohio, Indiana and Kentucky.  Year over year revenues and profits have been fairly stable for at least the past 3 years, and although the company is currently paying out slightly more cash in its dividend than it is generating, I don’t expect this to be an issue that will affect the price per share, or the payout this quarter.  At the current price per share, the annualized return is well over 5%.  I will consider buying a position to capture the dividend if the price per share declines to under $17.40 over the next few weeks.

Eli Lilly is, of course, a well known and large pharmaceutical firm.  Lilly has relatively stable, but slowly growing revenues, and manages its costs well, producing a predictable profit.  The price of the stock has remained in a range of a low that is just over $32.00 per share, to a high of just under $38.00 per share.  The closing price on Friday was $34.90.  I will be watching this stock, and possibly opening a position if the price declines to a point that is below $34.40.  The dividend payment will be $0.48 per share, which translates to another  annual yield of well over 5%.

Paychex is one of the leading providers of outsourcing for the payroll function for small to mid-sized companies.  The company grew rapidly in the 1990’s, and has experienced a flattening of revenue over the past few years as this market has matured and attracted a variety of competitors.  As they continue to seek new customers to grow market share, Paychex is also expanding into new areas with its existing base of customers, to provide value added services, such as 401k plan management. 

Since August of 2010, the price of the stock has been steadily increasing as Paychex has managed its costs well.   The company’s business model is one of a recurring revenue stream from it’s contracted subscriber base, so its revenues and profits are fairly predictable, and an uptick in the economy can only help a service company such as Paychex.  I don’t expect any surprises in either direction over the next few weeks, and will look at the possibility of opening a position if the price of the stock declines below $30.75.

Closing

I’ve received some encouraging feedback privately about this blog, and some questions that I have responded to privately as well.  There have been over 100 visitors to the site, from the US, Canada (Hi Vince!) and Asia (Samir, is that you??)  Feel free to post comments or questions here on the blog, or, if you want to correspond privately, email me at ken.hannan@gmail.com  The blog is intended to generate discussion and ideas.  I am not a professionally licensed trader, and don’t pretend to know everything.  As always, you should do your own research before making any decisions on investing.  What is right for one person is not always good for another.

Most of the ideas I get are based on screening tools that I run, followed by reading about the company, and reviewing summary financial statements and key indicators about the performance of each company.   Other ideas originate as a result of many years of business experience and natural curiosity about a variety of businesses.  A few are from discussions I have had with people I have grown to respect, like my father-in-law, who first introduced me to the dividend opportunity with The Southern Company.

Until next week, 

Ken

Happy New Year! 01/01/11

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.  

3 Companies with approaching ex-dividend dates

There are 3 companies that I have begun to accumulate that are, in my opinion, reasonably priced, and have ex-dividend dates approaching in early January.

AT&T (NYSE – Symbol T)

This is a company that is financially conservative, and fairly predictable in terms of revenue and earnings per share.  It is well managed, and there are very few surprises that cause the stock to move precipitously in either direction.

Recently, there has been speculation about the effect on revenues and profits as a result of its main competitor in the wireless market, Verizon, when the exclusive arrangement with Apple expires, and Verizon begins selling the iPhone.  Personally, I think the concerns are exaggerated, and any negative effect on the price per share will be due to emotions, and not facts.

AT&T recently announced that it was increasing its dividend, and buying back shares of its own stock.  Both of these are indications of confidence by management of the future growth prospects for the company, and the sustainability of paying the dividend.

AT&T will pay a dividend of $.43 per share, which translates to an annual yield of about 5.9%.

I began to buy shares last week, and hold them at an average price of $29.24, which is slightly above where the stock closed on 12/23, at $29.20.  I plan to add more shares this week, hopefully below $29.15.

Usually when a company goes ex-dividend, you can expect the share price to decline slightly.  This is logical, since the value of the company is decreased as a result of the cash to be paid being reduced from its balance sheet.  In the case of AT&T, I expect that the price may fall below $29.00 in the days following the ex-dividend date of January 6, but I expect it will recover shortly thereafter.  Even if it doesn’t, AT&T fits in my criteria as a stock I would not mind holding as long as necessary until I can sell it at a profit.  The dividend will be paid on 01/31/11.

Verizon (NYSE – Symbol VZ)

This, of course, is another telecommunications giant, and is very similar to AT&T in terms of having fiscally responsible management, despite the fact that part of its business is comprised of the former WorldCom organization.   As you probably know, WorldCom perpetrated the largest fraud in the history of business in the US, and its leader, Bernie Ebbers, is in jail and will probably spend his remaining days there.  Verizon acquired what was left of WorldCom, and integrated it into its own organization, which was primarily a combination of ”Baby Bell” companies that evolved following the breakup of AT&T in the early 1980’s.  It is a company that is managed conservatively, and is also providing about a  5.6% annual yield.   The stock has increased recently due, I think, to speculation about the company’s overall prospects and fueled by the notion of taking share from AT&T as a result of the potential sales of wireless services to existing and future owners of Apple’s iPhone.

I was fortunate enough to start to pick up shares on 12/20 when the stock was at $34.84.  I plan to add more if it falls back anywhere under $35.00 over the next week or so.

Verizon goes ex-dividend on 01/06/11, at $0.4875 per share, payable on 01/31/11.

One final note: Since AT&T and Verizon compete vigorously, and each has its strengths and weaknesses, it is difficult to say which one will do better than the other in terms of shareholder value.  My approach is to “buy them both”, and treat the overall investment as one when deciding to sell the shares.  As long as I am profitable overall on the share price, and have successfully captured the dividend on both,  I will be able to declare victory and move on to the next set of stocks that are approaching their ex-dividend dates.

Bristol Meyers Squibb (NYSE – Symbol BMY)

This pharmaceutical company is a slow growth, well managed organization that steadily churns out a very nice dividend each quarter.  In my opinion, it is not growing fast enough to warrant making it as a long term hold in my retirement fund portfolio, but I am happy to buy it and sell it as long as it continues to trade in a narrow range.  I’ve been successful in the past by watching it closely and buying on slight dips in per share price, such as when the overall market experiences a short term selloff.  Then I wait for the ex-dividend date to pass, and sell the shares as soon as the share price recovers.   Boring? Perhaps. . .but with a 5% annual yield, over 9 million shares traded daily, and over 70% of the stock owned by institutions, I can definitely live with boring. 

The share price presently (12/23/10 close of $26.32) is actually slightly lower than where it was at this point just before the last quarterly dividend (9/23/10 close of $27.68), but above the lowest point between then and now (11/30/10 close of $25.24).  The stock has a beta of 0.58, and since the quarterly sales and earnings are flat, I don’t expect much volatility over the next few weeks, barring any unforeseen news that could result in a short term move.  I will start to purchase shares in my account if the stock falls below $26.25, and will buy more if it falls further.  I’d love to own this going into the ex-dividend date of 01/05/11 at an average price of less than $26.15.  Again, even if it doesn’t recover immediately, I have no problem holding this stock.

Welcome!

This is my first post in this blog.  I'd like to start by thanking you for visiting.

I intend to make this forum a resource for information sharing on strategies to capture short term dividend income while minimizing the risk of capital.

I do my own research to make my own selections every few days, scanning the markets to find opportunities for making short term investments that are intended to provide better than average returns.  The majority of my trades are made in my self directed IRA, so that the tax consequences of any dividend income and / or capital gains are deferred until the money is withdrawn, several years from now, when I retire.

I hope that you enjoy the blog, and that it has value for you.  If so, please visit the companies and organizations that choose to advertise here.

Ken