TXN - My Top 10 High Yield Dividend Stocks For February 2023

Summary

• I present my top 10 High Yield dividend stocks that are poised to offer strong future returns.
• The annualized rate of return for this watchlist is 16.31% over the past 27 months.
• The top 10 stocks for January returned 8.5% last month, outperforming VYM that posted a gain of 2.37% and SPY that returned 6.29%.
• Since inception, the watchlist trails VYM by 3.19%, and remains ahead of SPY by 4.41%.

Market Recap

2023 kicked off on a bright note, the SPDR S&P 500 Trust ETF ( SPY ) started the new year with a gain of 6.29% in January. Vanguard's High Dividend Yield ETF ( VYM ) also ticked higher last month by 2.37%. My watchlist jumped out of the gate a little faster, posting a return of 8.50% for January.

The final 2022 performance figures were pretty grim. SPY finished the year down 18.16%, my watchlist finished down 11.95% and VYM nearly stayed green but ultimately posted a loss of 0.45%. While VYM is not known to outperform SPY, the fund is enjoying a spell of better than average results. A 5 month winning streak for VYM over SPY was finally broken in January.

Comparing the combined returns for my monthly watchlist against VYM and SPY can be a little misleading. My watchlists are meant to showcase the best quality and value opportunities offering attractive dividend yields during each month. A more meaningful result of these selections can be better evaluated through a long term buy and hold strategy.

While it's never fun to watch your investments decline in value if you are a long-term investor, these are mostly paper losses. A sharp decline for a quality high-yield stock should be viewed as an opportunity to dollar cost average into the position.

The main purpose of a high dividend yield portfolio is not to outperform the broad market but to generate a passive income stream that is relatively safe, reliable, and one that can grow in the future. The top 10 stocks on my watchlist for February 2023, collectively, offer a 4.23% dividend yield that is more than double the dividend yield of the S&P 500. These 10 stocks have also grown their dividends at a historical rate of 12.88% per year during the last five years. Collectively, all 10 stocks appear to be potentially about 21% undervalued right now based on dividend yield theory.

The best way to create a strong high yield dividend portfolio is with a buy-and-hold strategy. This strategy forces you to think about the stocks you decide to invest your capital into as the plan is to hold the positions indefinitely. Applying this approach over the long term while focusing on potentially undervalued stocks, allows investors to generate alpha through capital appreciation. While this may not pan out for every position, diversifying your high-yield portfolio across 20 or more unique stocks will increase the odds of picking up shares of certain stocks when they are trading for bargain prices. The beauty of a long-term outlook is time; you can sit back and wait for the valuation to revert to historical norms, all the while collecting a generous passive income stream.

Watchlist Criteria

Creating the high yield watchlist, I had four areas of interest that I focused on: basic criteria, safety, quality, and stability. First off, the basic criterion aims to narrow down the list of stocks to those that pay a dividend, offer a yield above 2.75%, and trade on the NYSE and NASDAQ. The next set of criteria focuses on safety because that is a crucial part of a high yield investing strategy. The filter excludes companies with payout ratios above 100% and companies with negative 5-year dividend growth rates. Another level of safety can be associated with larger companies; therefore, the watchlist narrows in on stocks with a market cap of at least $10 billion. The next set of criteria set out to narrow down the list to include higher quality businesses.

The three filters for quality are: a wide or narrow Morningstar moat, a standard or exemplary Morningstar stewardship, and an S&P quality rating of B+ or higher. A Morningstar moat rating represents the company's sustainable competitive advantage, the main difference between a wide and narrow moat is the duration that Morningstar expects that advantage to last. Companies with a wide moat are expected to maintain their advantage for the next 20 years, whereas companies with a narrow moat are expected to maintain their advantage for the next 10 years. The Morningstar stewardship evaluates the management team of a company with respect to shareholders' capital.

The S&P quality rating evaluates a company's earnings and dividend history. A rating of B+ or higher is associated with above-average businesses. The last set of criteria focuses on the stability of a company's top-line and bottom-line growth. The filter eliminates companies with negative 5-year revenue or earnings per share growth rate. I believe a company that is growing both their top-line and bottom-line has the ability to provide growth to its investors in the future.

All of the stocks that pass the initial screener criteria (41 this month) are then ranked based on quality and valuation. Further, I sort the stocks in descending order based on the best combination of quality and value and select the top 10 stocks that are forecasted to have at least a 12% annual long-term return. With future earnings growth forecasts continuously being revised down I had to lower my 12% estimated return threshold down to 10% in order to find the top 10 stocks this month. Only 2 of the 10 selections had an expected rate of return that exceeded 12%.

February 2023 Watchlist

Here is the watchlist for February 2023. There are four changes from the prior month: Bank of Montreal ( BMO ), Comcast ( CMCSA ), Intel ( INTC ) and Truist Financial ( TFC ) drop off and are replaced by Fastenal ( FAST ), Morgan Stanley ( MS ), Restaurant Brands ( QSR ) and United Parcel ( UPS ). The data shown in the image below is as of 1/31/23.

All 10 selected stocks this month appear to be potentially undervalued based on dividend yield theory.

Please keep in mind that my return forecasts are based on assumptions and should be viewed as such. I am not expecting that these 10 companies will hit the forecasted returns. What I do expect is that these 10 companies have the potential to offer better returns during the next 5 years compared to the 31 high yield stocks that passed my initial filters but ranked worse on quality and valuation.

Past Performance

The top 10 list for January performed very well against the benchmarks I track, collectively the chosen stocks returned 8.50% last month. This was 6.13% better than VYM and 2.21% better than SPY. The top 10 list is off to a great start this year and will look to redeem itself from a not-so-great showing in 2022. Since inception, which was 27 months ago, the watchlist trails VYM by 3.19% but is outpacing SPY by 4.41%.

I do not expect that this watchlist will beat VYM or SPY every month. However, I believe that a buy-and-hold investing approach leveraging the stocks presented on this watchlist will generate long-term alpha compared to the broad market. I also have a personal target rate of return of 12% that I believe will be attained by this watchlist when measured over long periods of time.

Following January, the long-term annualized rate of return for the watchlist improved from 12.67% to 16.31%. The 2 years of history I have measured thus far is a long period of time but I would really like to have 5 or 10 years of results before I start passing more judgment.

Individual watchlist returns for January 2023 were:

• (TFC) +14.78%
• ( CMCSA ) +13.38%
• ( BMO ) +12.27%
• (BBY) +10.61%
• ( EPD ) +8.17%
• ( TXN ) +8.03%
• ( MDT ) +7.68%
• ( VZ ) +7.17%
• ( INTC ) +6.92%
• (MMM) -4.04%

Top 5 Stocks by total return since joining the watchlist:

1. ( PFG ) +156.39% (27 months)
2. ( GD ) +87.19% (27 months)
3. ( BMO ) +84.81% (27 months)
4. ( TD ) +71.09% (27 months)
5. ( CVS ) +66.04% (27 months)

PFG gained 10.28% in January and remains well above 100% retaining its first place. GD fell 5.5% but holds onto second place. BMO gained 12.27% last month and jumps up into third place. TD added 8.08% in January and pops back into the top 5 list. CVS fell 4.68% and drops down into the 5th spot. MRK shed 3.19% last month and falls outside the top 5 list.

Top 5 Stocks by Average Monthly return since joining the watchlist:

1. ( FDX ) +7.07% (4 months)
2. ( SWKS ) +6.67% (4 months)
3. ( VZ ) +4.08% (2 months)
4. ( PFG ) +3.55% (27 months)
5. ( MDT ) +3.35% (2 months)

In total there have been 68 unique high yield dividend stocks that have appeared in the top 10 list during the past 2 years. Out of these 68 unique stocks 56 have a positive total return since first appearing on the top 10 list, 5 more compared to a month ago. The average total return for these 56 stocks is 35.66% (32.96% last month). The average loss for the 12 stocks that have negative total returns is -16.52% (-17.87% last month). Here are all 68 stocks, their total return since inception and the number of months since they first appeared in the top 10 list.

Buy-And-Hold Portfolios

The buy-and-hold [BAH] portfolios are a more useful measure of how a long-term investing approach utilizing this watchlist could perform. With the new year I also have a new BAH portfolio, in total there are 3 that I am tracking now. Each BAH portfolio invest an equal amount each month into all 10 chosen high yield stocks, the positions are never sold and all dividends are reinvested back into the issuing stock.

Here's a quick breakdown of how each portfolio is performing.

The 2021 buy-and-hold portfolio has now been around for 2 full years. It returned 6.89% in January, outperforming both VYM and SPY. After this good month, the portfolio sees its annualized alpha over VYM increase to 2.67% and increase to 9.92% over SPY. On an annualized basis, the portfolio has a return of 15.51% compared to 12.84% for VYM and 5.59% for SPY.

The portfolio is made up of 50 unique high yield dividend stocks. Below is a table of all of the positions, the cumulative return for each component and the allocation as of January 31, 2023.

The 2022 BAH portfolio performed even better in January, returning 9.78%. As a result, the underperformance to VYM shrunk from 8.97% to 2.48%, and the outperformance over SPY also increased from 8.74% to 12.45%. I believe the portfolio will catch-up to VYM and offer alpha in the long run, much of the gap from last year was bridged in January.

As of month end January, the portfolio is made up of 34 unique high yield dividend stocks. Below is a table of all of the positions, the cumulative return for each component, and the allocation as of January 31, 2023.

The 2023 BAH portfolio kicked off with a strong gain in January, returning 8.50%. As a result, it starts out 6.13% ahead of VYM and 2.21% ahead of SPY.

The portfolio starts out with the 10 high yield dividend stocks that were part of the January top 10 list. Below is a table of the positions, the cumulative return for each component, and the allocation as of January 31, 2023.

Two benefits these portfolios offer over VYM and SPY are a higher starting dividend yield and more consistent dividend payment schedules. The 2021 BAH portfolio is performing very well thus far, the 2022 portfolio got off to a slow start but is looking more promising here in 2023, and the 2023 portfolio is off to a great start.

I believe that a buy-and-hold investing approach is the best strategy for all dividend investors. If you apply this strategy targeting quality companies trading for attractive prices, you should achieve better-than-average results in the long run.

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