A Good Time to Capture Dividends

 | Oct 23, 2013 | 11:00 AM EDT
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The mystery of why the Fed did not start tapering in September was answered, presumably, by the pitiful jobs report. A taper was unlikely with the looming debt limit battle, but the jobs report confirmed that the recovery is not accelerating --  which seems to be a hard prerequisite for QE to end.

Whatever you think of the politics of it -- or the long-term implications -- the near-term reaction of the markets is making for an Oktoberfest of epic proportions. The S&P 500 is up 4.5% this month (almost as good as the blowout, greater than 5% performances in January and July), and interest rates are plunging back to old lows. Naturally, dividend yields are influenced by rates as well, so dividend stocks are having a blowout month as well. The chart below shows the plunge in 10-year rates (blue line) and the corresponding rally in the DVY.

These are good times for dividend capture. You can make good money holding the dividend payers; you can make better money trading them and compounding your income. A key element of the dividend rotation strategy is to "make hay while the sun shines". Good dividend rotators will step up their activity level in good conditions, and pull back when the market is unaccommodating. Right now, the market is accommodating.

The first month of the quarter is normally a slow dividend month. I barely made my income target in July. But this month I have already exceeded it by 20% and am now lining up the November dividends (meaning I am buying names now that will not go ex until sometime in November.)

The end of this month is presenting an interesting barbell of dividend opportunities, if you are still building your positions. There is a cluster of master limited partnerships paying large dividends, and a cluster of smaller, but regular, corporate payouts on the way.

At the top of the table are the "dangerous" names. There is nothing inherently wrong with the businesses -- in fact, they are great stable cash flow names with a tax-preferred structure. For a buy and hold income strategy, I would recommend them. A relatively safe 4% to 5% yield is never a bad thing. To trade these for the dividend is a different story, however.

These names are owned for the income and will trade efficiently -- they will drop on the ex-date and you will wait some time to get out. For individuals, you also have the nightmare of getting dozens of K-1s for short holding periods. In the case of Publix, I doubt you can even buy any because it is so illiquid, and if you get in you may never get out!

I committed my capital to the names in the bottom half of the table. These are regular corporate payouts, and the names represent a wide diversity of industry exposure. Kinder Morgan Partners (KMP) may not make sense to trade, but Kinder Morgan Inc. (KMI) certainly does.

ConAgra (CAG) is an old standby with stability in the business and the stock, and I expounded last week on how I like Canadian banks like the Bank of Montreal (BMO). The bottom group represents a great set of names to capture income as we exit an October to remember.

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