It's always fun to look both backward and forward during the New Year holiday, so I'll indulge in a bit of nostalgia in this last Dividend Diva column of 2011.
A review of this year's performance shows that my dividend fund threw off almost 10% in dividend income this year. I captured 261 dividends, using roughly 30% of the fund's capital, while the other 70% was the foundation invested in a solid set of growth stocks. Our average dividend return was 1.16%, while the average total return on a trade (dividend plus capital gain/loss) was 0.5%. The total return was affected by the bear-market spells we suffered through this year (since last spring, almost every month was down for the S&P 500).
Our biggest dividend was the recent Limited Brands (LTD) special, which represented a payout of more than 9%. Limited is a good lesson in how to play specials, because you won't gain back the full dividend amount to get out of the trade even. Happily, this doesn't matter; all you want is to have a positive total return. We sold Limited this week at a loss from our cost, but combining the 9% with an approximate 6% capital loss generated a total return of 3.35% over a 24-day holding period. Annualize that! (I continue to hold Limited, since the earnings momentum is great, but I doubled the position size into the dividend, then cut it back to normal 24 days later.)
Another lesson learned was the trade in Frontier Communications (FTR), initiated on Sept. 1. Although we collected 5% in income, the stock was bombed this fall and the trade lost 21%. The lesson here is that not every trade works, and the goal is to minimize your loss when it doesn't. Because the yield is so high, you could actually hold FTR and approach your overall yield target, but you risk more capital loss. I held FTR through two dividend payments, but got killed on the stock. I should have taken my lumps and gotten out sooner. Unfortunately, there is no formula for when to take a loss and move on -- that is the art of dividend rotation, and why you need to exercise judgment and expertise to be successful at it.
Looking forward, our dividends for 2011 are finished, obviously, so I am setting up for January. Another concept of dividend rotation trading is to buy in advance of the ex-date, rather than the day before. There isn't a lot of money in the market dedicated to dividend capture, but there is enough that stocks will run up in the last few days ahead of a dividend. This makes getting out a bit tougher. If you can buy a week or two ahead of a dividend, you have a better chance of having a lower cost basis and getting out more quickly after the dividend. You don't want to go more than a week or two ahead though, because then you are owning it rather than trading it, and you are tying up your capital for a longer period. Remember, the name of the game is capital utilization.
The upcoming dividend lineup looks OK. The January dividends are from December declarations, which is normally a slower month. February will be busy, as boards declare dividends in January in conjunction with earnings reports. So be active next month and plan to be even more active in February.
Despite my bad experience in FTR, the communications sector is a good one for yield, and we have both AT&T (T) and Verizon (VZ) paying out next week. Both go ex-dividend Jan. 6, with T paying 1.46% and VZ paying 1.25%. Be careful of the T chart, which is hitting recent highs (confirming that lesson to get in earlier).
General Mills (GIS) is paying 0.75% on the same day; I like playing the consumer staples for their stability. The following week, Abbott Labs (ABT) is teed up for 0.85% on the Jan. 11. After that, it's slow going until later in the month, although more will get filled in later. We'll look at later dividends in a future column.
As we close the curtain on 2011, I want to wish all our readers a safe and prosperous 2012. I hope it yields you good health, good friends and family, and good income!