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 17.78% over the past 22 months.
- The top 10 stocks for August were down 3.96% last month, losing to VYM that posted a loss of 2.45% but beating SPY that fell 4.08%.
- Since inception, the watchlist trails VYM by 1.23% and is ahead of SPY by 5.27% on an annualized basis.
Market Recap
And the market woes of 2022 continue in August as bad news from the Fed sees the market give up the early gains in the month. The SPDR S&P 500 Trust ETF ( SPY ) fell by 4.08%, Vanguard's High Yield Dividend ETF ( VYM ) fell by 2.45%, and my watchlist finished in the middle with a loss of 3.96%. Year-to-date, through August, SPY is down 16.17%, my watchlist is down 8.22% and VYM is down 6.1%. The watchlist continues to perform well against SPY but trails VYM over the past 22 months.
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 September 2022, collectively, offer a 3.96% dividend yield that is more than double the dividend yield of the S&P 500. It is also significantly better than the dividend yield of VYM that hovers around 2.4%. These 10 stocks have also grown their dividends at a historical rate of 20.63% per year during the last five years. Collectively, all 10 stocks appear to be potentially about 38% 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 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.
September 2022 Watchlist
Here is the watchlist for September 2022. There are three changes from the prior month: Darden Restaurants ( DRI ), Restaurant Brands ( QSR ) and Digital Realty Trust ( DLR ) drop off and are replaced by Comcast ( CMCSA ), Texas Instruments ( TXN ) and Truist Financial ( TFC ). Texas Instruments once again presents a dividend yield barely north of the minimum threshold of 2.75%. The data shown in the image below is as of 8/31/22.
All 10 selected stocks this month appear to be potentially undervalued based on dividend yield theory. However, the potential undervaluation for Advance Auto Parts ( AAP ) continues to be misleading because of the very fast dividend growth during the past couple years. I believe the company looks attractive at its current valuation, but it is not 85% undervalued as dividend yield theory suggests. It will take a few more months and maybe even a year or two for the historical yield to balance out with the current yield.
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 26 high yield stocks that passed my initial filters but ranked worse on quality and valuation.
Past Performance
The August watchlist did not perform well last month, losing 3.96%. It did slightly edge SPY that lost 4.08%. The watchlist continues to trail VYM but did make up a ton of ground in July with 6.28% of outperformance. The annualized underperformance to VYM shrank from 4.35% to just 0.24% after July, post August it widens to 1.23%.
And even thought the watchlist outperformed SPY in August, it sees its alpha over SPY shrink from 5.61% to 5.27%. I do not expect that this watchlist 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.
Thus far, the watchlist has exceeded my expectations and I believe it will continue to do so in the long run.
Date | Watchlist | ALL | VYM | SPY |
6 month | -8.46% | -4.19% | -4.19% | -8.82% |
3 month | -4.42% | -4.91% | -5.98% | -3.89% |
1 month | -3.96% | -2.18% | -2.45% | -4.08% |
YTD | -8.22% | -4.49% | -6.10% | -16.17% |
Since Inception | 34.98% | 42.24% | 37.58% | 24.12% |
Annualized | 17.78% | 21.19% | 19.01% | 12.51% |
Individual watchlist returns for August 2022 were:
- ( QSR ) +10.05%
- ( MS ) +1.09%
- ( BLK ) -0.42%
- ( DRI ) -0.63%
- ( TROW ) -2.81%
- ( DLR ) -6.66%
- ( BX ) -7.97%
- ( BBY ) -8.18%
- ( INTC ) -11.19%
- ( AAP ) -12.90%
Top 5 Stocks by total return since joining the watchlist:
- ( PFG ) +103.91% (22 months)
- ( MTB ) +86.09% (22 months)
- ( CVS ) +82.35% (22 months)
- ( GD ) +81.84% (22 months)
- ( BMO ) +65.77% (22 months)
PFG had a very good run in August adding 11.68% and pushing its total return on the watchlist past 100%, it remains in the lead and adds some cushion over all the other watchlist stocks. MTB posted a good 3.12% gain in August and jumps past BMO into second place. CVS added 2.58% to its total return and jumps from fifth into third place. GD finished August up 1% and retains its 4th position. BMO shed 8.42% and drops down into fifth place with a very wide gap to the 4 watchlist leaders. The 6th highest total return is 55.6% from TD, so BMO still has a decent cushion to remain in the top 5 list for a while.
Top 5 Stocks by Average Monthly return since joining the watchlist:
- ( TXN ) +4.03% (2 months)
- ( PFG ) +3.29% (22 months)
- ( HD ) +2.88% (2 months)
- ( MTB ) +2.86% (22 months)
- ( ATO ) +2.77% (9 months)
Buy-And-Hold Portfolios
The buy-and-hold portfolios are a more useful measure of how a long term investing approach utilizing this watchlist could perform. I started tracking one for 2022 and one since 2021. Both buy-and-hold portfolios 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 20 full months. It lost 1.79% in August, beating both VYM and SPY. After this beat, the portfolio extends its cumulative alpha to 3.37% over VYM and 9.41% over SPY. On an annualized basis, the portfolio has a return of 14.10% compared to 10.73% for VYM and 4.69% for SPY.
TOTAL | Cumulative | 2021 | 2022 | Annualized |
2021 B&H | 24.59% | 32.97% | -6.30% | 14.10% |
VYM | 18.51% | 26.21% | -6.10% | 10.73% |
SPY | 7.93% | 28.76% | -16.17% | 4.69% |
It is now made up of 44 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 August 31, 2022.
Symbol | Return | Alloc. |
AAP | -12.43% | 2.57% |
AMGN | 9.81% | 5.91% |
ATO | 27.84% | 0.63% |
AVGO | 5.84% | 3.11% |
BBY | -16.94% | 3.25% |
BEN | -20.39% | 0.39% |
BK | 1.96% | 0.50% |
BLK | 4.19% | 2.04% |
BMO | -10.55% | 0.88% |
BX | -10.70% | 2.19% |
CMI | 6.99% | 0.52% |
CMA | 11.77% | 1.64% |
CMS | 14.94% | 1.13% |
CSCO | -12.48% | 0.86% |
DLR | -10.07% | 2.20% |
DRI | -7.55% | 3.17% |
DTE | 21.66% | 1.79% |
EPD | 15.62% | 1.13% |
EVRG | 15.39% | 2.82% |
GD | 61.06% | 1.58% |
HBAN | 12.97% | 0.55% |
HD | 5.85% | 0.52% |
INTC | -19.23% | 1.19% |
JPM | -7.09% | 0.91% |
LMT | 24.41% | 4.26% |
MMM | -26.59% | 5.75% |
MS | -3.34% | 5.21% |
MTB | 29.49% | 5.07% |
NTRS | 6.85% | 1.57% |
PEP | 22.39% | 2.40% |
PFG | 28.46% | 5.03% |
PGR | 44.63% | 1.42% |
PM | 6.73% | 4.18% |
QSR | 5.59% | 5.17% |
RY | 5.68% | 2.59% |
SNA | 6.66% | 0.52% |
STT | -0.85% | 1.46% |
TD | 3.27% | 4.55% |
TFC | -15.95% | 1.65% |
TROW | -8.42% | 3.14% |
TXN | 8.22% | 0.53% |
UPS | 0.86% | 1.98% |
USB | -11.75% | 1.30% |
PARA | -21.91% | 0.76% |
The 2022 buy-and-hold portfolio did not perform as well in August, falling 3.62%. The portfolio trails VYM by 2.22% after 8 months but is outperforming SPY by 7.85%. I believe the portfolio will catch-up with VYM and offer alpha in the long run.
TOTAL | Cumulative |
2022 B&H | -8.32% |
VYM | -6.10% |
SPY | -16.17% |
As of month end July, it includes 27 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 August 31, 2022.
Symbol | Return | Alloc. |
AAP | -12.43% | 6.98% |
AMGN | 8.90% | 2.89% |
BBY | -16.94% | 8.83% |
BEN | -20.39% | 1.06% |
BLK | 4.19% | 5.54% |
BMO | -17.34% | 1.10% |
BX | -10.70% | 5.93% |
CMI | 6.99% | 1.42% |
DLR | -10.07% | 5.98% |
DRI | 4.93% | 2.79% |
EPD | 5.66% | 1.40% |
HD | 5.85% | 1.41% |
INTC | -12.50% | 2.33% |
LMT | 20.52% | 1.60% |
MMM | -18.66% | 5.41% |
MS | -1.35% | 10.49% |
MTB | 20.71% | 1.60% |
PM | 3.18% | 1.37% |
QSR | 7.57% | 8.58% |
RY | -16.82% | 1.11% |
SNA | 6.66% | 1.42% |
TD | -15.82% | 2.24% |
TROW | -8.42% | 8.52% |
TXN | 8.22% | 1.44% |
UPS | 0.86% | 5.36% |
USB | -19.02% | 2.15% |
PARA | -21.24% | 1.05% |
Two benefits these portfolios offer over VYM and SPY are a higher starting dividend yield and more consistent dividend payment schedules. The 2021 buy-and-hold portfolio is performing very well thus far, and the 2022 portfolio hasn't been around long enough to be properly evaluated.
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.
For further details see:
My Top 10 High Yield Dividend Stocks For September 2022