My Top 10 High Yield Dividend Stocks For October 2022

Market Recap

Just when you think the year can’t get any worse September sees the worst single monthly losses this year across almost all major indices. My watchlist, VYM and SPY were not exempt from this pain. The SPDR S&P 500 Trust ETF (SPY) dropped 9.24%, Vanguard’s High Dividend Yield ETF (VYM) shed 7.89%, and my watchlist finished the month down 11.40%. Year-to-date, through September, SPY is down 23.92%, my watchlist is down 18.68% and VYM is down 13.51%. The watchlist continues to perform well measured against SPY but is having trouble keeping up with VYM.

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 in 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 October 2022, collectively, offer a 4.13% 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 3.4%. These 10 stocks have also grown their dividends at a historical rate of 15.36% per year during the last five years. Collectively, all 10 stocks appear to be potentially about 45% 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 (45 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.

October 2022 Watchlist

Here is the watchlist for October 2022. There are four changes from the prior month: Advance Auto Parts (AAP), Intel (INTC), Truist Financial (TFC), and Texas Instruments (TXN) drop off and are replaced by American Tower Corporation (AMT), FedEx (FDX), Paramount Global (PARA) and Skyworks Solutions (SWKS). Several of the newly presented stocks this month experienced worse than average share price drops during September. The data shown in the image below is as of 9/30/22.

All 10 selected stocks this month appear to be potentially undervalued based on dividend yield theory.

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 35 high yield stocks that passed my initial filters but ranked worse on quality and valuation.

Past Performance

The September watchlist did not perform well, collectively losing 11.40% last month. This loss was 3.51% worse than VYM and 2.16% worse than SPY. However, on a year-to-date basis the watchlist remains ahead of SPY and continues to trail VYM. As a result the annualized underperformance to VYM widens from minus 1.23% following August to 3.36% after September.

The watchlist also gave up a lot of its previously earned alpha to SPY, the outperformance shrinks from +5.27% to +3.38%. 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 September, the long-term annualized rate of return for the watchlist drops below 12% (9.79%). However, I maintain my long-term belief that this watchlist will produce a 12% annualized rate of return over a long enough period of time. 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	-19.76%	-14.88%	-14.12%	-20.24%
3 month	-5.65%	-6.11%	-6.01%	-4.93%
1 month	-11.40%	-9.19%	-7.89%	-9.24%
YTD	-18.68%	-13.27%	-13.51%	-23.92%
Since Inception	19.60%	29.17%	26.72%	12.65%
Annualized	9.79%	14.29%	13.15%	6.41%

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Individual watchlist returns for September 2022 were:

• (TXN) -6.31%
• (AAP) -6.46%
• (TFC) -7.05%
• (MS) -7.29%
• (BBY) -9.33%
• (BX) -10.90%
• (TROW) -11.57%
• (BLK) -16.91%
• (CMCSA) -18.96%
• (INTC) -19.27%

Top 5 Stocks by total return since joining the watchlist:

1. (PFG) +98.46% (23 months)
2. (MTB) +80.51% (23 months)
3. (CVS) +77.19% (23 months)
4. (GD) +68.53% (23 months)
5. (BMO) +57.50% (23 months)

The ranking order for the 5 best long-term stocks on the watchlist did not change after September. PFG remains in the lead after losing 2.67% in September and seeing its since inception return dip below 100%. MTB posted a 3% loss last month. CVS shed 2.83% in September. GD lost 7.32% and BMO fell by 4.99%. Collectively these 5 stocks performed significantly better than the watchlist, VYM and SPY in September.

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

1. (PFG) +3.03% (23 months)
2. (MTB) +2.60% (23 months)
3. (CVS) +2.52% (23 months)
4. (GD) +2.30% (23 months)
5. (BMO) +1.99% (23 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 21 full months. It lost 8.56% in September, losing to VYM but beating SPY. After this mixed result month, the portfolio sees its cumulative alpha over VYM shrink to 2.6% and increase to 8.91% over SPY. On an annualized basis, the portfolio has a return of 7.74% compared to 5.14% for VYM and -1.17% for SPY.

TOTAL	Cumulative	2021	2022	Annualized
2021 B&H	13.93%	32.97%	-14.32%	7.74%
VYM	9.16%	26.21%	-13.51%	5.14%
SPY	-2.04%	28.76%	-23.92%	-1.17%

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The portfolio is made up of 45 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 September 30, 2022.

Symbol	Return	Alloc.
AAP	-16.42%	2.99%
AMGN	3.00%	5.78%
ATO	14.84%	0.59%
AVGO	-5.04%	2.91%
BBY	-22.98%	3.54%
BEN	-33.42%	0.34%
BK	-5.44%	0.48%
BLK	-14.02%	2.19%
BMO	-15.01%	0.87%
BX	-18.84%	2.49%
CMI	1.10%	0.52%
CMA	-0.19%	1.53%
CMCSA	-18.96%	0.41%
CMS	-0.89%	1.01%
CSCO	-21.72%	0.80%
DLR	-27.09%	1.86%
DRI	-5.60%	3.37%
DTE	8.12%	1.66%
EPD	4.46%	1.07%
EVRG	0.02%	2.55%
GD	49.27%	1.52%
HBAN	12.37%	0.57%
HD	1.26%	0.52%
INTC	-30.91%	1.41%
JPM	-14.64%	0.87%
LMT	14.39%	4.09%
MMM	-34.77%	5.33%
MS	-10.13%	5.50%
MTB	25.61%	5.13%
NTRS	-3.13%	1.48%
PEP	16.76%	2.38%
PFG	25.03%	5.11%
PGR	37.03%	1.40%
PM	-5.86%	3.84%
QSR	-3.94%	4.90%
RY	2.27%	2.61%
SNA	-1.43%	0.50%
STT	-10.87%	1.36%
TD	-1.56%	4.52%
TFC	-18.91%	2.07%
TROW	-18.08%	3.35%
TXN	-2.46%	1.00%
UPS	-16.24%	1.71%
USB	-21.07%	1.21%
PARA	-35.74%	0.66%

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The 2022 buy-and-hold portfolio did not perform as well in September, falling 10.32%. The portfolio trails VYM by 4.28% after 9 months but is outperforming SPY by 6.13%. I believe the portfolio will catch-up with VYM and offer alpha in the long run.

TOTAL	Cumulative
2022 B&H	-17.79%
VYM	-13.51%
SPY	-23.92%

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As of month end September, it includes 29 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 September 30, 2022.

Symbol	Return	Alloc.
AAP	-16.42%	7.65%
AMGN	2.14%	2.67%
BBY	-22.98%	9.07%
BEN	-33.42%	0.87%
BLK	-14.02%	5.62%
BMO	-21.46%	1.03%
BX	-18.84%	6.37%
CMCSA	-18.96%	1.06%
CMI	1.10%	1.32%
DLR	-27.09%	4.77%
DRI	7.14%	2.80%
EPD	-4.54%	1.25%
HD	1.26%	1.32%
INTC	-26.00%	2.90%
LMT	10.82%	1.45%
MMM	-27.72%	4.73%
MS	-8.41%	10.78%
MTB	17.09%	1.53%
PM	-8.99%	1.19%
QSR	-2.14%	7.68%
RY	-19.50%	1.05%
SNA	-1.43%	1.29%
TD	-19.76%	2.10%
TFC	-7.05%	1.22%
TROW	-18.08%	8.57%
TXN	-2.46%	2.55%
UPS	-16.24%	4.38%
USB	-27.57%	1.90%
PARA	-35.19%	0.85%

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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.