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High Yield Stock Watchlist Criteria
The companies listed on this watchlist are stable, with a track record of paying and raising their dividends consistently. Each of the companies listed below has a market cap of at least $3 billion. The companies must also have an S&P Capital IQ Earnings and Dividend Ranking of A-, A or A+. This filter helps to establish if the company has achieved, and should continue to achieve, lower price volatility when compared to the broader market.
Next, the current annual dividend yield of the companies on this watchlist is at least 3%. While there could be some debate as to what qualifies a company as “high yield,” 3% is sufficient for me. In addition to the 3% yield, a 10-year dividend growth rate of at least 4% is the next filter used.
Companies I invest in for income should be growing their dividend at least at the rate of inflation, and the United States inflation rate has not exceeded 4% in more than 30 years (until 2021). Lastly, a company must be able to maintain a growing dividend for me to consider investing in it, so a trailing twelve-month payout ratio of less than 90% is used as the final filter.
I use dividend yield theory to determine if a stock is potentially undervalued or overvalued. This simple idea suggests a company’s yield should revert to the mean over time. An example below is Regions Financial Corporation (RF), the current yield is 3.45% while its five-year average is 3.05%. The difference is 40 basis points or approximately 13%, suggesting the stock could be undervalued. It is worth noting I consider any stock that is overvalued or undervalued by 5% to be approximately fairly valued, see also Watsco, Inc. (WSO) below.
| Company | 10-Year DGR | Dividend Yield (11/30/22) |
Div. Yield (5-Year Avg.) |
Overvalued/Undervalued |
| Bank of New York Mellon Corp. (BK) | 10.48% | 3.22% | 2.26% | -42% |
| Comerica Inc. (CMA) | 21.13% | 3.79% | 3.19% | -19% |
| Darden Restaurants, Inc. (DRI) | 10.12% | 3.29% | 3.17% | -4% |
| Fifth Third Bancorp (FITB) | 15.07% | 3.63% | 2.94% | -23% |
| Fidelity National Financial, Inc. (FNF) | 12.51% | 4.46% | 3.13% | -42% |
| Interpublic Group of Companies, Inc. (IPG) | 16.23% | 3.38% | 3.79% | 11% |
| 3M Co. (MMM) | 10.41% | 4.73% | 2.96% | -60% |
| Morgan Stanley (MS) | 26.51% | 3.33% | 2.24% | -49% |
| Omnicom Group Inc. (OMC) | 10.65% | 3.51% | 3.47% | -1% |
| Packaging Corporation of America (PKG) | 17.46% | 3.68% | 2.71% | -36% |
| PNC Financial Services Group, Inc. (PNC) | 15.36% | 3.57% | 2.56% | -39% |
| Regions Financial Corp. | 31.85% | 3.45% | 3.05% | -13% |
| State Street Corp. (STT) | 11.46% | 3.16% | 2.39% | -32% |
| T. Rowe Price Group, Inc. (TROW) | 13.29% | 3.84% | 2.46% | -56% |
| U.S. Bancorp (USB) | 13.15% | 4.23% | 2.83% | -49% |
| Watsco, Inc. | 13.08% | 3.27% | 3.16% | -3% |
Goal
The goal of my high yield watchlist is to discover companies to add to my dividend growth portfolio in an attempt to consistently exceed the market return of the Vanguard High Dividend Yield ETF (VYM). Through November 2022, an equally weighted portfolio of these 16 stocks mentioned above would have underperformed the VYM by about 13%. VYM is up 3.14% year to date while the stocks above have lost 10.26%.
| Symbol | November Returns | YTD Return through November |
| BK | 9.00% | -18.45% |
| CMA | 1.76% | -15.45% |
| DRI | 2.69% | 1.13% |
| FITB | 1.88% | -14.33% |
| FNF | 2.49% | -20.16% |
| IPG | 16.31% | -4.89% |
| MMM | 1.32% | -26.05% |
| MS | 13.27% | -1.92% |
| OMC | 9.64% | 12.14% |
| PKG | 13.04% | 2.45% |
| PNC | 3.97% | -13.24% |
| RF | 5.74% | 9.14% |
| STT | 7.66% | -12.07% |
| TROW | 17.66% | -34.53% |
| USB | 6.93% | -16.74% |
| WSO | -0.73% | -11.26% |
| VYM | 6.26% | 3.14% |
Final Thoughts
This high yield dividend watchlist is used to identify companies worthy of further research. Stock prices fluctuate continuously, and although there are legitimate reasons for an increase or decrease, occasionally there are times the market is just overreacting to a short-term issue. I believe if you can identify the reason(s) and determine for yourself if a decline in stock price is justified, you can minimize risk in your portfolio by purchasing a company’s stock when their yield is higher than normal.
Lastly, the significant difference between the YTD return for the watchlist and the YTD return of VYM has me thinking I should review and modify my criteria for the watchlist. I am planning to continue using the criteria I have for December; however, I think beginning in January I will have new criteria which will hopefully get me closer to my goal of finding companies that can meet or exceed the return of VYM.
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