A Tale of Two Dividends

 | Mar 05, 2014 | 11:00 AM EST
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I am not declaring a "Dividend D-day", but Thursday is still a fairly good one with a couple dozen going ex-, several of which are pretty attractive. Seven dividends will be over a 0.90% payout, which is as close as you can get to the sweet spot in the dividend capture strategy.

If you are playing the strategy and don't already have several positions, take a look at the list and get active today. Dividend activity is going to slowly diminish as we move toward the end of the month and into April.

I want to contrast two large dividends going ex- tomorrow, CenturyLink (CTL) and Reynolds American (RAI). Both have fat dividends: CTL will pay out 1.74% and RAI will pay 1.34%.

CTL is an $18 billion market cap secondary telecom carrier with a rural service footprint and slow growth. It generates good cash flow, hence the fat payout, and is owned mainly as a yield stock by income-oriented investors. Because of this, the high dividend you will capture is offset by "efficient" trading. CTL typically drops enough that it takes some time for the stock to recover to the purchase price. Looking at the chart, you can see a fair amount of volatility, but there is a rhythm to it.  I have played CTL repeatedly over the past few years, so you certainly can capture a lot of income in it, but you may be stuck for a month or two holding it. (The same is true of Verizon (VZ) and AT&T (T), by the way.)

Reynolds American is also an income stock, but the tobaccos just behave differently. From the lows in 2009, these names were severely undervalued because of the legacy fears of the tobacco settlement. That was never an issue because they got state governments to enjoy the revenue as much as customers enjoy the product.

The chart for RAI, as well as the other major tobaccos Philip Morris (PM), Altria (MO), Lorillard (LO), looks great, and has made for great dividend capture. You collect the dividend, and you are out in two weeks.

Tobaccos have been the single best group for this strategy -- I have rotated through every name, for every quarter, for years. It may not last forever, but as long as they have an addictive product, pricing power, and government sponsorship (remember: settlement) you can play them with confidence.

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