Diary of a Dividend Diva: When Playing in Controversy

 | Jul 08, 2013 | 11:00 AM EDT  | Comments
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A couple weeks ago, Linn Energy (LINE) came up as a point of controversy here at Real Money. I do not follow the name closely, so I am offering no opinion as far as that's concerned. I do, however, want to use it as a case study in the dividend-capture trading strategy. Linn Energy offers two lessons -- one in using dividend capture to avoid controversy, and one in not using a name that doesn't trade "right." 

As noted, I have no thoughts to offer on Linn's fundamentals. I do fully support healthy debate about the issues -- while avoiding personal attacks and so on. But, beyond that, keep this in mind regarding any name that offers an attractive yields but generates controversy: Dividend capture can be a way to garner the income while avoiding the volatility associated with the stock. By only owning it for a short period around the dividend ex-dividend date, you avoid the (downside) volatility generated by whatever controversy is swirling around that stock. 

In the case of Linn Energy, just look at the dividend history. Until the last year or so, you could buy it right before it went ex-dividend, and be out of it at your purchase price within a month or two. I occasionally played Linn for the payout back in 2011 and 2012. 

Linn also demonstrates the type of stock not to use for dividend capture. The few times I played it, I found it took too long to get out at my purchase price. A 30-day holding period is fine, and 13 is great. But when your holding period stretches into 60 or even 80 days, you basically are in the stock for the whole year -- meaning you are not avoiding those fundamental issues, as you would prefer. 

I just found that Linn Energy traded too efficiently. Look at the chart -- the stock was rock-solid around $39, and all of the return came from the dividend. I want stocks that investors don't own for the income, and Linn Energy fits more with utilities and other income-type names. For dividend-capture to really work, you need to be in and out in 30 to 45 days, and not much longer than that. 

I have not played Linn Energy for more than a year. I may look at it again now, given the lower price, but I will probably not be tempted in. This is a great example of a stock that is not great for dividend capture but, at the same time, shows the benefit of dividend capture in general as a means of avoiding controversy.

In contrast to Linn Energy, I play the tobacco names over and over with great results, although they are typically always mired in some minor controversy. I am able to avoid those, but can still enjoy the income. That's having your cake and eating it too.

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