Catching that Dividend and then Escaping with Your Capital

A while ago I wrote about what investors need to do in order be eligible for dividends so I’m not going to talk about that again.   Instead, I want to talk about a new strategy that I’ve been trying when the opportunity presents itself and I have time to take advantage of it.

First, I look for high yield dividend paying stock that is very very stable.   Some examples are Verizon, Vodaphone,  and Telus.  All 3 happen to be North American telecom companies.  Price stability is very important in this strategy and they are usually stable because they pay regular dividends, increase regularly, and have a long history of paying dividends.  Although they may fluctuate in price, they are much more stable than a lot of other stocks including the banks.

Second, look at the dividend ex-date.   You must figure out how much time you have before this ex-date.   We’re looking for at least 3 weeks time frame and no more than 8 weeks.

Third,  look for market volatility.  Lately, we have a lot of that so it’s very easy.  However, going back to the first step, market volatility affects the higher risk stocks the most and the lower risk stocks the least.  That’s why when the market is down a lot in the day, we call it a risk off day.    Everyone is selling the higher risk stocks.  The examples that I’ve chosen from the first step do fluctuate with the market but it’s relatively small.

For Verizon, they are a huge company in the United States but they have high growth in both wireless communications, high speed internet and television.  Revenue is consistent every quarter because of their subscriber base that is mostly locked into contracts or have little turnover.

On the other side of the world, we have Greece and other European countries throwing a wrench or a grenade into global markets almost every few weeks but WHY would it affect the price of Verizon stock every time this happens?    The reason is because Verizon stock is tied to a lot of other investment instruments such as ETFS, and mutual funds.  When people sell these investments, they don’t care whether it includes Verizon or not.    There are also a lot of traders that just dump everything as soon as the proverbial shit hits the fan because they’re traders, not investors.  They’ll just buy back later or buy something else.  They’re locking in their gains or limiting their losses.

The same goes with Telus.  It’s a Canadian telecom company that has a growing smart phone subscriber base and a new television package that they are selling like hot cakes.   How is company related to Greece, Spain, or Italy?  It’s not at all but it is not immune from market volatility.

When a high yielding dividend stock approaches the ex-date, the stock will almost always move up if it has been oversold, and then move back down on the ex-date.

The fourth step  is to buy the stock when you see that the stock price has gone down due ONLY to the market volatility and the ex-date is coming up in about a month.   A month is the time that I try to use because it allows for enough time for the stock to bounce back but the range as I mentioned above is 3 to 8 weeks.  Read all the available news for the company for the day that the stock has gone down before buying it.  Since stocks like Verizon and Telus don’t really go down in price much, I usually scale in.  I’ll buy a small number of shares first, and then buy again the next day to avoid buying it at price that is too high because we’ve seen how the market can drop almost 1000 points on the DOW in a week.  We can’t know for sure when the bottom is but we are pretty certain that the stock price will bounce by the dividend ex-date.

The fifth step is to be prepared to hold the stock for more than 1 quarter.  It might take longer to bounce back but at least you collect the dividend so you get paid to wait.

Verizon stock closed today at $38.35 but you can see that it has been in the $35.25 range quite often in the last 3 months.  Telus stock closed today at $55.36 but you can see how it has fluctuated in the $51 and $53 range in the last 3 months.  The dividend ex-date just passed on Dec 8th,2011, and you can see how the stock ramped up as expected as soon as the date got closer.  Next time it goes there, maybe you can try this strategy.  The capital gain is usually about 4 to 9%.  The difficulty with this strategy is not only the timing but also the capital required.   The more you put in, the more you get out of it.   I usually invest at least $10,000, that will give me about 250 shares of VZ or 200 shares of Telus.  If the stock goes up a few dollars, then I can have a gain of about $500.   The key here is profiting from volatility with minimal risk and then escaping with your capital to invest in something else or at least not having it be at the mercy of this crazy volatile market.

What to do What to do..

If you’re still in the stock market then you’ll probably notice that almost all your holdings are down.  This is where diversification comes into play.   Not diversification of equities because that’s pretty useless.

You’ll need real estate, precious metals, high dividend paying stocks, bonds, and cash.    That’s only to reduce your losses.  As long as you are investing your cash, you are accepting inherent risk.

Lately I’ve seen the market over sell and over buy a lot.  I’ve been trying to buy some on over sold days and sell on over bought days just to make a little bit of money with my free cash.  Hope everyone is doing great!

 

 

Lululemon is back!

Lululemon is back!

Lululemon Athletica is back, alive and kicking.   They had mostly been in the dog house last year and early this year with a slow recovery from the recession but after surpassing analyst expectations in last Thursday’s earnings report, the share price jumped 16%.

Now let’s review the analyst side of the story.    Some analysts are ahead of the game and some are way behind.  As an example, Taposh Bari who is an analyst at Jefferies and Co. is way way behind.

On Aug 30th, his comment on Lululemon was:

“We see [Lululemon] as one of the most compelling concepts in retail but also believe there is a disproportionate amount of risk to earnings and sentiment at this company.”  and he cut the outlook for Lululemon to underperform.  Soon after that,

So Confusing…

I’ve been pretty bad at posting new blogs although I have been thinking about material to write.   I just haven’t brought myself to doing so until now because once again, an analyst has really confused the outlook on Research in Motion (RIM).  I’m very glad that this analyst isn’t from RBC Capital Markets this time.   I don’t like to pick on just one institution. 

Thanks for NOTHING

First I’d like to say that I have no preference for any brokerage or analysts but I know that the last post I did about RIM pointed out how off the RBC Capital Markets analyst was.  Once again I’m talking about RBC Capital Markets, albeit a different analyst because they released an update on 3PAR on 9/3.  The recommendation was to buy, and the target price was raised to $33.   For those of you who haven’t been watching the bidding war between HP and Dell over 3PAR, let me get you up to speed.   HP had officially won the bidding war for $33/share when it started with Dell offering $18/share.  It went back and forth several times before Dell gave up on 9/2.  The next day,  RBC releases this untimely information when the deal is pretty much done, recommending a Buy with a target price of $33.  The stock was already at $32.88 with the remaining 12 cents due to the unlikely risk that the deal would fall apart.  Exactly how does this information help investors?   Perhaps when it was hovering around $10, indiciating that it was a take over target would be useful or even guessing how much the 3PAR would sell for would be helpful. 

That’s why I say Thanks for NOTHING.

Am I Diversified?

If you watch Jim Cramer’s Mad Money show on CNBC, he has a segment called Am I Diversified?  This is where callers name their top 5 holdings in their portfolio and Cramer tells them whether they are diversified based on the sectors that the companies are in.  For example, if you have two stocks that are in semiconductors like Intel and AMD, then you are definitely not diversified and the importance of this is that if people stop buying computers, then both of these companies will suffer severely and for the same reason.  You want to be diversified so that even if one sector goes down, your other stocks will be little to not affected at all.

In the last epsiode that I watched, I took those same stocks that the callers had and charted them in Yahoo to compare the price correlation.

Here are the 2 examples from the show aired on 7/30 where both groups were considered “diversified” based on the sectors that the companies belonged to.  I created the 6 month and 12 month chart and I included the DOW as well.

On 7/30

Kinder Morgan (KMP) – Pipe line
Omega Healthcare (OHI) – real estate investment company for health care
Pennantt Park(PNNT) – investment company
Windstream (WIN)- Telco
Linn Energy (LINE) – Exploration Energy

6 Months

1 Year

Altria (MO) – Tobacco
Vodaphone (VOD) – Telco
Abbott (ABT) – Pharma company
Yum (YUM) – fast food restaurants
Copano Energy (CPNO) – energy

6 Months

1 Year

You’ll notice that in both cases there is a lot of the same price movement for each stock.  Look at how each of the stocks have their major dips and spikes at the same time.  I realize that picking the best stock or the best of breed is the way to go, but if all the stocks move in the same direction, on the same days,  then are you really diversified?  If you look at longer term performance, the best companies will definitely succeed but if you’re a shorter term investor then I feel that diversification is much harder to come by using this strategy of trying to be in different unrelated sectors/industries.
One of the main reasons why I blame the similar price movement the introduction of ETFs.  ETFs encompass encompass so many different groupings of stocks and their trade volume is huge.  Some ETFS are matched to the S&P, the DOW, or the Nasdaq, others might be small cap, medium cap, country specific, growth, income generating, or based on different sectors.  There’s even at least one ETF  just for casino gaming, a very clever name too, BJK – as in Black Jack.  When all these ETFs are being traded, the stocks within the ETF follow a closer correlation.

For example, one of the most popular ETFs is SPY which is tracks the S&P 500 index.  The average daily volume is 260 million.  Compare that with Apple (AAPL), the average volume is 26 million which is one tenth and Apple is already a very popular stock.  The more ETFS we have and the higher the trading volume, the more closely the prices will correlate.  Think about what we’re really doing here when we want to invest in the SPY ETF. We’re saying that the holdings within SPY are going to go up. If everyone agrees with this, as more money enters SPY, more money is distributed to each of the stocks and as a result, the price of these companies will go up.  The opposite is true if investors want to sell SPY because they’re bearish.  Some of the holdings in SPY include, Microsoft, Exxon, AT&T, etc.  Here is where you can find the details:

http://finance.yahoo.com/q/hl?s=SPY+Holdings

Now think about what we’re doing if we ONLY buy Apple (AAPL) stock.  We believe that Apple stock will go up. We’re not saying that AT&T, Exxon, Microsoft, etc. are going to go up too and therefore there is no price correlation between our purchase of Apple stock and any other stocks in the market.  We might think that Microsoft will go up too but we’re not putting money into it unless we actually buy that stock as well individually.  ETFs create the correlation and the more that investors or institutions trade these, the closer the correlation will be.

If you really want to diversify your stocks in the short term, pick stocks that do not have price correlation with each other and I think a good way to do that is by just drawing the charts in Yahoo Finance.

Here is a chart comparing the performance of the DOW and NASDAQ with the most popular Gold ETF, GLD.

Gold compared with the Dow and Nasdaq

My recommendation is to diversify using different asset classes and but I’d like to save this for my next post since it is a lot to talk about.

RIMM – All across the board…

If you’ve ever been interested in purchasing Research in Motion (RIMM) stock, you’d probably be confused with all the different analyst opinions because they are all across the board.  How is this company so unpredictable?  RIMM is the maker of Blackberries which are incredibly popular. 

They released their 1st quarter results last evening and the stock has dropped more than 5% today.  In the past quarter, they added 4.9 million subscribers alone and with a net of 46 million subscribers, they generated $4.35 billion in revenue.   Recently when I went to an Alicia Keys concert, it looked like half the people had blackberries.  They were texting and trying to take pictures with them.  It seems like people either have an iPhone or Blackberry.  It’s amazing how dominant these 2 companies are in the smart phone market.  However, the performance of this stock is based on the expectation of enormous future growth and from this point of view, they have disappointed analysts.  There is a lot of action on this stock and from my own experience, I’ve taken losses and gains so I’m always looking to get back into it.

So what have analysts been saying? 

BP Oil Spill Day 63

Everyone including myself is concerned about this oil spill.  How much oil is leaking into the ocean?  When is it going to stop?  What wild life/plant life has been affected?  This is a huge man made disaster.  It hasn’t gotten any better since the explosion on the rig on April 20th.  With that much oil coming out, I would have thought the well would be empty by now but it just goes to show that oil companies like BP know where the oil is.  

Investors want to know whether it’s a good time to buy BP.  This is a difficult answer with so many unknowns such as how much is BP liable for?  how much is it going to cost to clean up?  When is this well ever going to be capped?  I am not willing to invest in BP yet especially after they have cancelled the dividends for the rest of 2010.  It is also very volatile, yo-yoing between about $29 and $32. 

Here is what the analysts have been saying since the beginning:

Upgrades/Downgrades

Date	Brokerage Firm	Action	From	To	Old	New
21-Jun-10	Oppenheimer	Reiterated		Outperform	$55	$45
17-Jun-10	Barclays Capital	Downgraded	Equal Weight	Underweight	N/A	N/A
27-May-10	Oppenheimer	Upgraded	Perform	Outperform	N/A	$55
26-May-10	Howard Weil	Reiterated		Market Outperform	$70	$60
03-May-10	Argus	Downgraded	Buy	Hold	N/A	N/A
26-Apr-10	The Benchmark Company	Downgraded	Buy	Hold	N/A

I particularly like Oppenheimer for giving their opinion twice since the spill started.

It is absolutely obvious that BP’s target price should be lower than whatever it was before because no analyst could have expected a disaster of this magnitude, and the cost to fix this both in the short term and the long term is tremendous.  Cutting the dividend alone should result in a proportional target price reduction.  I believe a lot of investors especially long term ones have lost a significant amount of money because of this kind of coverage that is not updated according to the most recent events.  Investors need to do as much research as possible and make their own decisions because they cannot count on timely updates from analysts.

Virus Free Blog Reading

Have you ever caught a virus just from reading a blog?   I don’t know how it has become so dangerous to surf these days but I would never risk clicking on different sites from my Google/Bing search without an up-to-date virus scanner.

I read a lot of different financial blogs and in my research, I’m constantly hitting sites that have unsuspecting viruses.  I’ve found that this FREE virus scanner is doing a good job.  I’ve been using it for a month so far:

Avast!

http://www.avast.com/en-ca/index

You can download the free version or pay for other versions.

I’ve found few things more annoying than trying to fight viruses that pop up miscellaneous websites or tell you to provide a credit card number to buy a virus scanner that will fix the solution.  I don’t get anything for recommending this anti-virus software but I don’t mind recommending software that will help my readers.

Buying, Catching, and Chasing Dividends

Whether you’ve heard about these terms, “buying”, “catching”, or “chasing” dividends, they all mean the same to me. This is about buying a stock at the right time, for the main purpose of receiving a dividend payout. This is not an easy thing to do because everyone knows about it and there are drawbacks. The main drawback is that the stock usually drops immediately after the date that you have bought it.   First of all I must warn you that I haven’t been doing this for a long time but I’ve put together a summary of my strategy that I try to stick by.

What is the right time to buy?

You must buy before the Ex-Div date and you can only sell it on the Ex-Div date or later to be eligible for the dividend. Your purchase then settles by the record date and you are then on the list of owners to be paid.  As the date gets closer to the stock’s Ex-Div date, it may experience a run up in price.  For this reason, you may want to buy it on a dip as it is running up.  If you bought in really early, you may actually want to sell on the day before the ex-div date for those capital gains and forget about the dividend.

Pros?

• Since not all dividend dates are the same amongst companies, the cash you use to buy one dividend can be used again for another dividend from another company. This effectively increases the number of dividends that you receive in a year with the same amount of money. Investors who do not trade regularly usually keep their money in dividend pay funds, or ETFS, or individual stocks for the entire year which means their money will usually be paid 4 dividends per year from each company.

• Reduces your exposure to stocks
  In times where the market is going down or is very volatile, you won’t have all your cash stuck in the market because you’ll be instead waiting for the right time to buy that dividend and then you get out as soon as you can for about the same price that you bought at.

• Tax purposes
  Dividend payments are taxed less so you get to keep more of it.

• Short term investing

If you need your cash for something else, you can still get into the market and get out

Cons?

• Risk of losing
• Requires active investing

Here are the 7 major attribute that I would look for in a stock as a potential candidate for dividend buying:

1. The stock doesn’t drop on the Ex-date or if it does, it should bounce back in the short-term(i.e. less than a month). If the stock drops and you have to hold on to it or sell it for a loss, there is no point in trying to buy its dividend. However, often times even if the stock does drop initially, it may bounce back quickly and that will be your opportunity to cash out.  There are also some stocks that occasionally go up on the ex-div date but that is rare
2. Bull market – typically if the market is trending upwards, there is less of a drop, and more potential for capital gains in addition to receiving its dividend. This would especially be true for faster growing companies.
3. A company with strong fundamentals
   If I’m going to be stuck keeping a stock in the short-term, at least I’d like to know that there good long-term potential for capital gains.
4. Company has declared the dividend or you must be confident that dividend will be paid
   The company should have declared the dividend prior to the dividend being paid out and there is nothing in the air that would have you doubt that it will be paid if they haven’t explicitly declared it.
5. Recurring dividend
   The dividend will be paid again in the next scheduled opportunity, i.e. next quarter, next month, etc. as opposed to a one time payout. One time payouts are too risky unless you’re planning on holding the stock for the long term in which case you’re not actually buying it for a dividend in the first place. Hot Topic Inc. as I mentioned is one example where a one time dividend payout did not work out well for investors who did not get out in time.
6. Low commission fees and significant capital
   Don’t do this if you’re not going through a discount brokerage or you’re not using  significant capital. You might end up losing money due to commission.  It’s too much risk for too little.
7. Significant dividend yield
   In my opinion, good dividends are ones that pay more than you can make on any interest investments such as high interests CDs/savings accounts at US banks( GICs at Canadian banks). Right now I’d be interested in any dividend yield more than 4% per year but I’ll always do the math to make sure it’s worth doing.

Here is an example to further illustrate a potential candidate.  As of today, the dividend yield for Verizon (VZ) is 7% and it pays quarterly so that works out to 1.75% per quarter.

You can review their history of dividend payouts:

http://investor.verizon.com/stockinfo/dividend_history.aspx

Then you can check what their historical prices are at Yahoo.

http://finance.yahoo.com/q/hp?s=VZ

Then you can look at the chart to see how the stock behaves after a the ex-date.

http://finance.yahoo.com/echarts?s=VZ+Interactive#chart2:symbol=vz;range=1y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

You can see that the stock drops on the EX-Date every time, but when you look at the chart, the price bounces back within a month to the price you can safely sell at or above the price that you bought it at before the Ex-Date.