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Market Recap
The Q4 market rally popped in December, and the popular “Santa Rally” never came this year. The year instead ended on a sour note with the SPDR S&P 500 Trust ETF (SPY) falling 5.76% last month, Vanguard’s High Dividend Yield ETF (VYM) falling 3.49%, and my watchlist posting an even worse loss of 6.11%.
The final 2022 performance figures are pretty grim. SPY finished the year down 18.16%, my watchlist finished down 11.95% and VYM nearly stayed green but ultimately posted a loss of 0.45%. While VYM is not known to outperform SPY, the fund is enjoying a spell of better than average results: December marks 5 consecutive months of outperformance.
Comparing the combined returns for my monthly watchlist against VYM and SPY can be a little misleading. My watchlists are meant to showcase the best quality and value opportunities offering attractive dividend yields during each month. The true results of these selections can be better evaluated in a long term buy and hold strategy.
While it’s never fun to watch your investments decline in value if you are a long-term investor, these are mostly paper losses. A sharp decline for a quality high-yield stock should be viewed as an opportunity to dollar cost average into the position.
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 2023, collectively, offer a 4.83% 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 2.8%. These 10 stocks have also grown their dividends at a historical rate of 9.56% per year during the last five years. Collectively, all 10 stocks appear to be potentially about 33% 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 (36 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. Only 9 watchlist stocks this month had a return forecast greater than or equal to 12%, therefore I selected 1 more based on the next best return forecast.
January 2023 Watchlist
Here is the watchlist for January 2023. There are two changes from the prior month: Morgan Stanley (MS) and T. Rowe Price Group (TROW) drop off and are replaced by Bank of Montreal (BMO) and 3M Company (MMM). The data shown in the image below is as of 12/31/22.
Created by Author
All 10 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 26 high yield stocks that passed my initial filters but ranked worse on quality and valuation.
Past Performance
The December watchlist did not perform well against the benchmarks I track, collectively the 10 chosen stocks lost 6.11% last month. This was 2.62% worse than VYM’s return and 0.35% worse than SPY. Ultimately the watchlist lost 2022 to VYM by a pretty wide margin, the watchlist finished the year with a loss of 11.95% while VYM posted a loss of 0.45%. The watchlist did perform significantly better than SPY that finished the year with a loss of 18.16%. Since inception, which was 26 months ago, the watchlist trails VYM by 6.36% but is outpacing SPY by 3.40%.
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 December, the long-term annualized rate of return for the watchlist fell from 16.68% to 12.67%. The 2 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.
|
Date |
Watchlist |
ALL |
VYM |
SPY |
|
6 month |
2.16% |
3.66% |
8.17% |
2.27% |
|
3 month |
8.27% |
10.40% |
15.09% |
7.57% |
|
1 month |
-6.11% |
-4.08% |
-3.49% |
-5.76% |
|
YTD |
-11.95% |
-4.25% |
-0.45% |
-18.16% |
|
Since Inception |
29.49% |
42.60% |
45.85% |
21.17% |
|
Annualized |
12.67% |
17.80% |
19.03% |
9.27% |
Individual watchlist returns for December 2022 were:
- (VZ) +1.08%
- (MDT) -0.80%
- (EPD) -2.78%
- (CMCSA) -4.56%
- (BBY) -4.96%
- (TFC) -8.08%
- (TXN) -8.45%
- (MS) -8.65%
- (TROW) -11.75%
- (INTC) -12.11%.
Top 5 Stocks by total return since joining the watchlist:
- (PFG) +132.49% (26 months)
- (GD) +98.19% (26 months)
- (CVS) +74.19% (26 months)
- (MRK) +65.45% (20 months)
- (BMO) +64.61% (26 months).
PFG fell 6.42% in December but remains well above 100% and retains first place. GD fell 1.7% but firmly holds onto second place. CVS fell 8.53% and falls significantly behind GD. BMO fell 7.39% and falls down to 5th place. MRK posted a gain of 1.41% last month and jumps into 4th place, knocking MTB out of the top 5 list.
Top 5 Stocks by Average Monthly return since joining the watchlist:
- (FDX) +5.50% (3 months)
- (PFG) +3.30% (26 months)
- (GD) +2.67% (26 months)
- (HD) +2.59% (6 months)
- (MRK) +2.55% (20 months).
In total there have been 68 unique high yield dividend stocks that have appeared in the top 10 list during the past 2 years. Out of these 68 unique stocks 51 have a positive total return since first appearing on the top 10 list, 3 fewer compared to a month ago. The average total return for these 51 stocks is 32.96% (35.72% last month). The average loss for the 17 stocks that have negative total returns is -17.87% (-17.78% last month). Here are all 68 stocks, their total return since inception and the number of months since they first appeared in the top 10 list.
|
Symbol |
Since Inception |
Count |
|
PFG |
132.49% |
26 |
|
GD |
98.19% |
26 |
|
CVS |
74.19% |
26 |
|
MRK |
65.45% |
20 |
|
BMO |
64.61% |
26 |
|
TD |
58.30% |
26 |
|
PGR |
51.98% |
23 |
|
MTB |
49.55% |
26 |
|
HBAN |
48.87% |
26 |
|
LMT |
47.94% |
26 |
|
GIS |
45.14% |
17 |
|
JPM |
44.68% |
26 |
|
PEP |
44.20% |
26 |
|
RY |
43.21% |
26 |
|
SRE |
41.90% |
22 |
|
CPB |
41.36% |
15 |
|
CSCO |
40.89% |
26 |
|
STT |
40.75% |
26 |
|
BK |
39.26% |
26 |
|
PAYX |
38.10% |
23 |
|
SO |
35.93% |
26 |
|
PM |
33.75% |
22 |
|
K |
32.53% |
22 |
|
AMGN |
29.59% |
26 |
|
AVGO |
29.25% |
20 |
|
BNS |
28.39% |
26 |
|
ATO |
27.15% |
13 |
|
XEL |
26.48% |
22 |
|
EVRG |
23.56% |
26 |
|
RCI |
23.17% |
26 |
|
CMS |
23.03% |
22 |
|
USB |
21.34% |
26 |
|
CMI |
21.13% |
10 |
|
NTRS |
20.23% |
26 |
|
DTE |
19.97% |
26 |
|
CM |
19.43% |
26 |
|
FDX |
17.43% |
3 |
|
EPD |
17.29% |
17 |
|
HD |
16.60% |
6 |
|
BLK |
15.90% |
8 |
|
TRP |
15.11% |
26 |
|
SNA |
12.63% |
11 |
|
TFC |
11.48% |
26 |
|
KMB |
10.19% |
23 |
|
TXN |
9.06% |
6 |
|
WEC |
8.23% |
24 |
|
SWKS |
7.59% |
3 |
|
QSR |
6.47% |
16 |
|
LNT |
5.92% |
26 |
|
VZ |
1.08% |
1 |
|
AMT |
0.16% |
3 |
|
MDT |
-0.80% |
1 |
|
CMA |
-0.82% |
21 |
|
DRI |
-1.03% |
17 |
|
CMCSA |
-2.53% |
4 |
|
MS |
-7.74% |
17 |
|
CLX |
-13.25% |
16 |
|
UPS |
-15.31% |
10 |
|
BEN |
-17.47% |
12 |
|
BBY |
-17.49% |
12 |
|
MMM |
-18.65% |
26 |
|
HAS |
-22.05% |
26 |
|
DLR |
-22.56% |
10 |
|
AAP |
-25.49% |
10 |
|
TROW |
-26.42% |
11 |
|
INTC |
-35.91% |
26 |
|
PARA |
-36.73% |
26 |
|
BX |
-39.48% |
9 |
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 2 full years. It fell 5.20% in December, trailing VYM but outperforming SPY. After this poor month, the portfolio sees its annualized alpha over VYM shrink to 0.31% and also shrink to 9.75% over SPY. Even though the portfolio outperformed SPY in December, its annualized lead has shrunk due to compounding. On an annualized basis, the portfolio has a return of 12.40% compared to 12.09% for VYM and 2.65% for SPY.
|
TOTAL |
Cumulative |
2021 |
2022 |
Annualized |
|
2021 B&H |
26.33% |
32.97% |
-4.99% |
12.40% |
|
VYM |
25.64% |
26.21% |
-0.45% |
12.09% |
|
SPY |
5.37% |
28.76% |
-18.16% |
2.65% |
The portfolio is made up of 50 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 December 31, 2022.
|
Symbol |
Return |
Alloc. |
|
AAP |
-20.72% |
2.56% |
|
AMGN |
20.83% |
5.36% |
|
AMT |
1.58% |
0.82% |
|
ATO |
27.15% |
0.51% |
|
AVGO |
20.58% |
2.92% |
|
BBY |
2.39% |
4.96% |
|
BEN |
-17.47% |
0.33% |
|
BK |
12.75% |
0.45% |
|
BLK |
14.51% |
2.77% |
|
BMO |
-11.17% |
0.72% |
|
BX |
-24.95% |
2.12% |
|
CMI |
21.13% |
0.49% |
|
CMA |
-5.17% |
1.15% |
|
CMCSA |
4.39% |
1.26% |
|
CMS |
8.65% |
0.88% |
|
CSCO |
-5.91% |
0.76% |
|
DLR |
-25.43% |
1.50% |
|
DRI |
4.34% |
2.95% |
|
DTE |
11.35% |
1.35% |
|
EPD |
4.40% |
1.26% |
|
EVRG |
7.08% |
2.16% |
|
FDX |
13.10% |
0.91% |
|
GD |
75.53% |
1.42% |
|
HBAN |
21.58% |
0.49% |
|
HD |
16.60% |
0.47% |
|
INTC |
-25.00% |
1.51% |
|
JPM |
10.54% |
0.89% |
|
LMT |
44.96% |
4.09% |
|
MDT |
-0.80% |
0.40% |
|
MMM |
-28.37% |
4.62% |
|
MS |
-1.67% |
5.95% |
|
MTB |
4.06% |
3.36% |
|
NTRS |
1.06% |
1.22% |
|
PEP |
30.00% |
2.10% |
|
PFG |
46.46% |
4.73% |
|
PGR |
53.07% |
1.23% |
|
PM |
16.23% |
3.75% |
|
QSR |
17.79% |
4.75% |
|
RY |
7.89% |
2.18% |
|
SNA |
12.63% |
0.45% |
|
SWKS |
7.12% |
0.86% |
|
STT |
14.61% |
1.39% |
|
TD |
5.06% |
3.81% |
|
TFC |
-15.04% |
2.40% |
|
TROW |
-10.45% |
3.97% |
|
TXN |
1.06% |
1.63% |
|
UPS |
-9.06% |
1.47% |
|
USB |
-13.69% |
1.04% |
|
VZ |
1.08% |
0.41% |
|
PARA |
-25.40% |
1.20% |
The 2022 buy-and-hold portfolio performed even worse in December, losing 6.77%. The underperformance to VYM widens from 6.00% to 8.97%, and the outperformance over SPY also shrinks from 10.31% to 8.74%. I believe the portfolio will catch-up with VYM and offer alpha in the long run, although the gap is pretty large after just one year.
|
TOTAL |
Cumulative |
|
2022 B&H |
-9.43% |
|
VYM |
-0.45% |
|
SPY |
-18.16% |
As of month end December, the portfolio is made up of 34 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 December 31, 2022.
|
Symbol |
Return |
Alloc. |
|
AAP |
-20.72% |
5.53% |
|
AMGN |
19.83% |
2.09% |
|
AMT |
1.58% |
1.77% |
|
BBY |
2.39% |
10.71% |
|
BEN |
-17.47% |
0.72% |
|
BLK |
14.51% |
5.99% |
|
BMO |
-17.92% |
0.72% |
|
BX |
-24.95% |
4.58% |
|
CMCSA |
4.39% |
2.73% |
|
CMI |
21.13% |
1.06% |
|
DLR |
-25.43% |
3.25% |
|
DRI |
18.42% |
2.07% |
|
EPD |
-2.05% |
1.71% |
|
FDX |
13.10% |
1.97% |
|
HD |
16.60% |
1.02% |
|
INTC |
-20.37% |
2.78% |
|
LMT |
40.43% |
1.22% |
|
MDT |
-0.80% |
0.87% |
|
MMM |
-20.64% |
3.46% |
|
MS |
-0.09% |
10.45% |
|
MTB |
-2.99% |
0.85% |
|
PM |
12.36% |
0.98% |
|
QSR |
20.00% |
6.28% |
|
RY |
-15.07% |
0.74% |
|
SNA |
12.63% |
0.98% |
|
SWKS |
7.12% |
1.87% |
|
TD |
-14.36% |
1.49% |
|
TFC |
-5.96% |
2.46% |
|
TROW |
-10.45% |
8.59% |
|
TXN |
1.06% |
3.53% |
|
UPS |
-9.06% |
3.17% |
|
USB |
-20.79% |
1.38% |
|
VZ |
1.08% |
0.88% |
|
PARA |
-19.59% |
2.10% |
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. Additionally, 2022 was a very interesting year for the stock market as high yield stocks performed significantly better than broad market indices.
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.
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