Leonid Sorokin
High Yield Stock Watchlist Criteria
The companies listed on this watchlist are stable with a track record of paying and raising their dividends consistently. The companies must 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 10% 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 Amgen Inc (AMGN), the current yield is 3.40% while its five-year average is 2.74%. The difference is 66 basis points or approximately 24%, 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.
| Company | 10 Year DGR | Dividend Yield (9/30/22) | Div. Yield (5 Yr Avg.) | Overvalued / Undervalued |
| Amgen Inc (AMGN) | 28.81% | 3.40% | 2.74% | -24% |
| Best Buy Co Inc (BBY) | 15.63% | 5.41% | 2.34% | -131% |
| Bank of New York Mellon Corp (BK) | 10.48% | 3.81% | 2.26% | -69% |
| BlackRock Inc (BLK) | 11.63% | 3.46% | 2.29% | -51% |
| Comerica Inc (CMA) | 21.13% | 3.76% | 3.19% | -18% |
| Comcast Corp (CMCSA) | 16.09% | 3.55% | 1.88% | -89% |
| Darden Restaurants Inc (DRI) | 10.12% | 3.74% | 3.17% | -18% |
| Fifth Third Bancorp (FITB) | 15.07% | 4.12% | 2.94% | -40% |
| Fidelity National Financial Inc (FNF) | 12.51% | 4.85% | 3.13% | -55% |
| Interpublic Group of Companies Inc (IPG) | 16.23% | 4.52% | 3.79% | -19% |
| JPMorgan Chase & Co (JPM) | 13.98% | 3.77% | 2.40% | -57% |
| Morgan Stanley (MS) | 26.51% | 3.88% | 2.24% | -73% |
| Omnicom Group Inc (OMC) | 10.65% | 4.41% | 3.47% | -27% |
| Principal Financial Group Inc (PFG) | 13.30% | 3.58% | 3.85% | 7% |
| Packaging Corp of America (PKG) | 17.46% | 4.38% | 2.71% | -62% |
| PNC Financial Services Group Inc (PNC) | 15.36% | 3.98% | 2.56% | -55% |
| Regions Financial Corp (RF) | 31.85% | 4.03% | 3.05% | -32% |
| State Street Corp (STT) | 11.46% | 4.08% | 2.39% | -71% |
| T. Rowe Price Group Inc (TROW) | 13.29% | 4.47% | 2.46% | -82% |
| Texas Instruments Inc (TXN) | 22.35% | 3.13% | 2.36% | -33% |
| UGI Corp (UGI) | 23.13% | 4.37% | 2.62% | -67% |
| US Bancorp (USB) | 13.15% | 4.71% | 2.83% | -66% |
| WEC Energy Group Inc (WEC) | 10.05% | 3.17% | 2.88% | -10% |
| Watsco Inc (WSO) | 13.08% | 3.44% | 3.16% | -9% |
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 September 2022, an equally weighted portfolio of these 24 stocks mentioned above would have underperformed the VYM by about 8.50%. VYM is down 13.51% year-to-date while the stocks above have lost 22.05%.
| Symbol | September Returns | YTD Return through September |
| AMGN | -6.20% | 2.65% |
| BBY | -9.33% | -35.53% |
| BK | -7.25% | -32.17% |
| BLK | -16.81% | -38.59% |
| CMA | -10.70% | -16.21% |
| CMCSA | -18.96% | -40.70% |
| DRI | 2.11% | -13.89% |
| FITB | -5.45% | -24.70% |
| FNF | -6.39% | -28.39% |
| IPG | -7.38% | -29.73% |
| JPM | -8.12% | -32.51% |
| MS | -7.29% | -17.51% |
| OMC | -4.69% | -11.30% |
| PFG | -2.67% | 2.48% |
| PKG | -17.08% | -15.34% |
| PNC | -5.43% | -23.72% |
| RF | -6.52% | -5.63% |
| STT | -10.11% | -32.89% |
| TROW | -11.57% | -44.96% |
| TXN | -6.31% | -16.24% |
| UGI | -17.39% | -27.57% |
| USB | -10.56% | -26.04% |
| WEC | -13.29% | -5.81% |
| WSO | -5.36% | -15.83% |
| VYM | -7.89% | -13.51% |
New Options
Fifth Third Bancorp appeared for the first time on the watchlist and is currently undervalued by about 40%. FITB lost nearly 5.5% during September is down almost 25% year-to-date. Fifth Third has a solid 10 year dividend growth rate of more than 15%, although its most recent increase, just last month, was a modest 10%.
Darden Restaurants is also new to the watchlist and is the only stock that had a positive return in the month of September. According to dividend yield theory the stock is undervalued by 18%. DRI boasts a 10.12% 10 year dividend growth rate and a payout ratio below 50% leaving ample room for future dividend growth.
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.
Be the first to comment