Diary of a Dividend Diva: The Sweet Spot

 | May 24, 2013 | 7:00 AM EDT  | Comments
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Stock quotes in this article:

lo

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bip

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abx

As I noted in Monday's installment of the diaries, we are in the thick of dividend season, with ample opportunity to drive significant income generation during May and early June. Today we will scan the opportunities coming next week, which are listed in the table below.

As always, this is a subset of the available dividends, screened for size and trading volume. I screen out tiny dividends, generally below 0.4%, since trading tiny dividends requires too much trading (and too high a "batting average") to hit your income objectives. I screen out the large dividends, such as those over 1.5% for instance, because they carry too much stock-specific risk. The super-high yield is telling you that the market does not trust the stock or the sustainability of the dividend.

My sweet spot is a dividend between 0.75% and 1%, which balances the required trading volume and the stock specific risk.

The stand out for next week is Lorillard (LO) which will pay 1.24% on the May 29. The tobaccos are a great group to rotate through for dividend captures as the payouts are reasonably high yet the stock prices are stable. They typically do not trade in the "sawtooth" fashion that characterizes most yield stocks, such as utilities or preferreds. Over the last few years I have very infrequently experienced a bad trade in the tobaccos and the income has been a huge boost to my dividend capture partnership.

A couple names I am avoiding that have similar payouts to Lorillard are Brookfield Infrastructure Partners (BIP) and Barrick Gold (ABX).  Brookfield is an LP and I avoid these simply due to the tax accounting difficulties. There are plenty of good ideas around, so I don't need the nightmare of a pile of K-1s! Barrick is off my list because my experience in mineral (and especially gold) names is one of extreme volatility around the ex-date. 

The goal in choosing a dividend capture trade is a stock that will be relatively stable, not dropping much -- if at all -- on the ex-date, and recovering to your buy price quickly. For whatever reason, mining names are simply not friendly to this strategy.

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