CapitalSource ex-div Hit: Opportunity?

by Travis Johnson, Stock Gumshoe | June 12, 2008 11:05 am

Sometimes companies that have huge dividends trade very erratically around the ex-div date (the date that the shares first trade without the right to receive the dividend).  That’s today for CapitalSource (CSE), a mortgage REIT that is in my portfolio, and that was aggressively touted by the Motley Fool’s Income Investor service as the “one best pick for your IRA this year.”

CSE has had a very rocky year — in the mid-$20s a year ago, before the credit crisis hit, then down to around $10 on a dip in April, and a nice climb during this calendar year back up to about $14 now.  The shares briefly got about $16 a few days ago, and closed with dividend rights yesterday at $15.03.  Today, trading without the .60 dividend, the shares fell as low as $13.18 — that means that in addition to dropping the .60 of the dividend the shares also fell as much as $1.20 or so, a haircut of nearly 8%.

This happens with some regularity with high-yield stocks, which means that if you find a stock you really like and want to build a position in, it can be effective to buy following a dividend payment.  There are always lots of investors who want to sell but wait until after the dividend payment is theirs before they do so (even if this is against their best interest in the end), and plenty of amateur and professional dividend arbritrageurs who try to trade around the dividend, or ride the ex-div momentum on days like this.

I’m not suggesting a purchase of CSE here, though I do continue to own it and reinvest my dividends, but if you’re interested the price will probably dip at least a few times between now and the next dividend as the div traders lose interest.

Be mindful that as of now, CSE still does not make enough in earnings to cover that dividend, so it can be considered a little risky (they do have the cash, so I expect they’ll continue to support the dividend during this business downturn).  I’m convinced that their acquisition of Fremont’s deposits will help in the long term with getting them a lower cost of funds, I think the management has a good enough track record to be optimistic of their future success, they have a good record of making loans that are backed by real collatrral, and I like that they have a strong healthcare focus with much of their lending … but in the sector they’re in, which is essentially borrowing money from institutions in order to lend it to companies, there is always, we have learned in the past year, potential for catastrophe.

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