PXD - My Top 10 High Yield Dividend Stocks For May 2023

2023-05-01 11:26:18 ET

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 14.50% over the past 30 months.
• The top 10 stocks for April returned 1.91% last month, outperforming VYM that posted a gain of 1.27% and SPY that returned 1.60%.
• Since inception, the watchlist trails VYM by 1.53% but is beating SPY by 2.65%, on an annualized basis.

Market Recap

2023 has been a pretty decent year for equities, in the first quarter equities on average delivered gains and quarter 2 started off on a similar note. The SPDR S&P 500 Trust ETF ( SPY ) posted a gain of 1.60% in April and is up 9.19% year-to-date. Vanguard's High Dividend Yield ETF ( VYM ) posted a gain of 1.27% in April but is still down 0.57% year-to-date. My watchlist managed to perform a little better in April, adding 1.91%, and it is doing just fine on the year, up 8.34% year-to-date.

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 May 2023, collectively, offer a 5.13% 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 32.29% per year during the last five years. Collectively, all 10 stocks appear to be potentially about 32% 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 (46 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.

May 2023 Watchlist

Here is the watchlist for May 2023. There are two changes from the prior month: ONEOK, Inc. ( OKE ) and Exxon Mobil ( XOM ) drop off and are replaced by Canadian Imperial Bank of Commerce ( CM ) and Texas Instruments ( TXN ). The data shown in the image below is as of 4/30/23.

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

Only 9 out of the 46 stocks that passes the screening criteria had an expected rate of return of 12% or more. Therefore, I selected the highest ranked stock that had an expected rate of return in excess of 10%, that stock is Morgan Stanley ( MS ).

Past Performance

The top 10 list for April performed well last month, collectively the chosen stocks gained 1.91%. This was 0.64% better than VYM and 0.31% better than SPY. The top 10 list is off to a great start this year and is making up for a lackluster showing in 2022. Since inception, which was 30 months ago, the watchlist trails VYM by 1.53% but is outpacing SPY by 2.65%.

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 April, the long-term annualized rate of return for the watchlist increased from 14.14% to 14.50%. The 2.5 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.

The watchlist has been rather hot the past 6 months, outpacing VYM by a wide margin and even gaining an edge on SPY. Year-to-date SPY is performing better but the margin of difference is not significant.

Individual watchlist returns for April 2023 were:

• ( XOM ) +7.92%
• ( UL ) +6.93%
• ( PXD ) +6.52%
• ( OKE ) +4.45%
• ( PNC ) +3.71%
• ( MS ) +3.35%
• ( MMM ) +1.06%
• ( TFC ) -4.46%
• ( STT ) -4.53%
• ( GLW ) -5.84%

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

1. ( MDT ) +12.81%
2. ( HAS ) +11.60%
3. ( CMCSA ) +9.96%
4. ( MRK ) +8.53%
5. ( KMB ) +7.95%

Top 5 Stocks by total return since joining the watchlist:

1. ( PFG ) +108.73% (30 months)
2. ( GD ) +76.38% (30 months)
3. ( MRK ) +73.35% (24 months)
4. ( BMO ) +67.57% (30 months)
5. ( PGR ) +60.05% (27 months)

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

1. ( XOM ) +7.92% (1 month)
2. ( FDX ) +6.49% (7 months)
3. ( PXD ) +5.57% (2 months)
4. ( UL ) +5.46% (2 months)
5. ( OKE ) +4.45% (1 month)

In total there have been 76 unique high yield dividend stocks that have appeared in the top 10 list during the past 2.5 years. Out of these 76 unique stocks 58 have a positive total return since first appearing on the top 10 list. The average total return for these 58 stocks is 30.44%. The average loss for the 18 stocks that have negative total returns is -17.52%. Here are all 76 stocks, their total return since inception and the number of months since they first appeared in the top 10 list.

Closer Look

Here's a closer look at Morgan Stanley.

7 Year Dividend Yield Theory Chart.

Historical Dividend Yield Chart.

Dividend History.

Here's a closer look at Corning.

7 Year Dividend Yield Theory Chart.

Historical Dividend Yield Chart.

Dividend History.

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