WTRG - My Top 10 High Yield Dividend Stocks For January 2024

2024-01-01 06:34:23 ET

Summary

• The year finished strong with Vanguard's High Dividend Yield ETF returning 5.62%, SPDR S&P 500 Trust ETF returning 4.57%, and my watchlist returning 11.53%.
• The top 10 stocks on the watchlist for January 2024 offer a 3.81% dividend yield, more than double the S&P 500.
• My top 10 list of high dividend yield stocks has generated an annualized rate of return of 15.56% since its inception in November 2020.

Market Recap

The Santa rally, started early this year but propelled strong market returns throughout the remainder of the year. Vanguard's High Dividend Yield ETF ( VYM ) notched an impressive 5.62% gain in December, capping off the year with a return of 6.58%. The SPDR S&P 500 ETF Trust ( SPY ) posted a strong 4.57% gain in December, finishing the year with a solid return of 26.18%. My watchlist, for the second consecutive month, surpassed both benchmarks with an 11.53% gain in December and finished the year with a commendable return of 22.07%. Since inception, November 2020, my watchlist once again moves ahead of VYM and SPY on an annualized basis. The since inception annualized returns stand at 15.56% for my watchlist, 14.95% for VYM and 14.35% for SPY.

My watchlist prioritizes growth and therefore tends to underperform when market sentiment is weak and outperform when market sentiment is strong. Given the historical tendency of more positive market periods than negative market periods, I am optimistic that in the long run my watchlist will deliver strong total returns.

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 January 2024, collectively, offer a 3.81% 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 18.21% per year during the last five years. Collectively, all 10 stocks appear to be potentially about 37% 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 (47 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.

January 2024 Watchlist

Here is the watchlist for January 2024. There are two changes from the prior month: Best Buy ( BBY ) and Discover Financial Services ( DFS ) dropped out and are replaced by Coca-Cola Europacific Partners PLC ( CCEP ) and Essential Utilities ( WTRG ). The data shown in the image below is as of 12/29/23.

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

The expected rate of return shown in the last column is computed by taking the current dividend yield plus a return to fair value over the next 5 years and a discounted long-term earnings forecast.

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 37 high-yield stocks that passed my initial filters but ranked worse in quality and valuation.

Past Performance

The top 10 list extended its strong performance from November into December, finishing the month with a gain of 11.53%. This was the third-highest monthly return since inception and only the fifth time this watchlist has exceeded a 10% gain during a single month. The top 10 list beat VYM by 5.91% and SPY by 6.96% during December, capping off a strong finish to the year. The final 2023 return for the watchlist is 22.07% compared to 6.58% for VYM and 26.18% for SPY. Since inception, which was 38 months ago, the watchlist has an annualized return of 15.56%, placing it 0.61% ahead of VYM and 1.21% ahead of SPY.

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 October the long-term annualized rate of return for the watchlist improved from 11.89% to 15.56%. My target rate of return is 12% and following the strong return in December, the watchlist once again is exceeding my expectations. It may dip below this range in the short term, but over a longer period of time, I believe it will exceed this threshold.

Individual watchlist returns for December 2023 were:

• Bank of America ( BAC ) +10.43%
• Best Buy ( BBY ) +11.72%
• CRH plc ( CRH ) +11.99%
• Discover Financial Services ( DFS ) +20.86%
• EOG Resources ( EOG ) -0.50%
• Goldman Sachs ( GS ) +12.95%
• Morgan Stanley ( MS ) +17.53%
• NextEra Energy ( NEE ) +3.81%
• Truist Financial ( TFC ) +14.87%
• Texas Instruments ( TXN ) +11.62%

Top 5 performing past and present watchlist stocks in December 2023:

1. Comerica Inc. ( CMA ) +24.96%
2. Broadcom ( AVGO ) +21.14%
3. Discover Financial Services ( DFS ) +20.86%
4. Bank of Montreal ( BMO ) +20.23%
5. Advance Auto Parts ( AAP ) +20.16%

Top 5 Stocks by total return since joining the watchlist:

1. Broadcom ( AVGO ) +164.02% (32 months)
2. Principal Financial Group ( PFG ) +125.95% (38 months)
3. General Dynamics ( GD ) +112.34% (38 months)
4. JPMorgan ( JPM ) +88.97% (38 months)
5. Bank of Montreal ( BMO ) +88.71% (38 months)

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

1. CRH plc ( CRH ) +11.99% (1 month)
2. Discover Financial Services ( DFS ) +5.91% (4 months)
3. FedEx ( FDX ) +3.81% (15 months)
4. Broadcom ( AVGO ) +3.08% (32 months)
5. Goldman Sachs ( GS ) +2.77% (7 months)

In total, there have been 81 unique high-yield dividend stocks that have appeared in the top 10 list during the past 38 months. Out of these 81 unique stocks, 67 have a positive total return since first appearing on the top 10 list. The average total return for these 67 stocks is 35.37%. The average loss for the 14 stocks that have negative total returns is -19.39%. Here are all 81 stocks, their total return since inception, and the number of months since they first appeared in the top 10 list.

Closer Look At New Stock

Here's a closer look at the new stocks this month: Coca-Cola Europacific Partners PLC and Essential Utilities.

Let's start with the 7-year dividend yield theory chart for CCEP.

Here is the historical dividend yield.

And its dividend growth history.

Here is the 7-year dividend yield theory chart for Essential Utilities.

Here is the historical dividend yield.

And its dividend growth history.

For further details see: