Market Recap
Signs of life returned to the stock market in May as the S&P finished the month in the green after a strong rally in the last few days. SPY tacked on 0.23% during the month and trimmed its year-to-date loss to 12.78%. My watchlist returned 1.38% and is down only 3.98% this year. VYM performed even better, returning 3.52% in May and nearly erasing all of its 2022 losses, the ETF is down just 0.12% this year. All of the past and present watchlist stocks offered the best return of 3.64% last month and are now positive on the year with a return of 0.44%. My watchlist is trailing VYM by 2.83% since inception on an annualized basis, however, it is still beating SPY by 6.83%.
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 safe, reliable, and one that can grow in the future. The top 10 stocks on my watchlist for June 2022, collectively, offer a 3.66% 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 2.5%. These 10 stocks have also grown their dividends at a historical rate of 20.18% per year during the last five years. Collectively, all 10 stocks appear to be potentially about 28% 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.
June 2022 Watchlist
Here is the watchlist for June 2022. There are no changes from the prior month except for a reshuffling in the order of best ranked stocks. The data shown in the image below is as of 5/31/22.
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.
Past Performance
The May watchlist returned 1.38% last month. The 60 dividend stocks that have appeared on this watchlist collectively returned a better 3.64%, beating the May watchlist, VYM and SPY. VYM returned 3.52% and SPY gained 0.23%. On a year-to-date basis VYM is performing the best with a loss of 0.12%, the watchlist is in a distant second place with a loss of 3.98% and SPY trails with a loss of 12.98%. The annualized return for the watchlist fell from 24.73% to 24.36%, even though the watchlist had a positive return in May. Since VYM performed better in May the annualized gap to the ETF has widened to 2.83%. However, the watchlist is still beating SPY by a wide margin of 6.83% since inception.
My personal target is an annual return of 12%, 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 |
3.33% |
8.37% |
6.62% |
-8.74% |
3 month |
-4.23% |
0.76% |
1.91% |
-5.13% |
1 month |
1.38% |
3.64% |
3.52% |
0.23% |
YTD |
-3.98% |
0.44% |
-0.12% |
-12.78% |
Since Inception |
41.22% |
49.59% |
46.33% |
29.14% |
Annualized |
24.36% |
28.96% |
27.18% |
17.53% |
Individual watchlist returns for May 2022 were:
- (BX) +15.97%
- (BLK) +7.11%
- (MS) +6.89%
- (MMM) +4.56%
- (TROW) +3.29%
- (UPS) +2.13%
- (DLR) -4.47%
- (AAP) -4.89%
- (QSR) -8.02%
- (BBY) -8.75%
Top 5 Stocks by total return since joining the watchlist:
- (PFG) +97.17% (19 months)
- (BMO) +93.60% (19 months)
- (MTB) +83.04% (19 months) NEW
- (TD) +82.50% (19 months)
- (CVS) +78.70% (19 months)
PFG gained 7.03% in May and catapulted to the top of the list surpassing BMO and GD. BMO had a modest gain of 2.69% last month but dropped out of the lead, a title it’s held for a very long time. A newcomer, MTB, jumped into the third spot after posting a strong 8.72% gain. TD returned 5.58% last month and moved up to 4th place. CVS picked up a very modest 0.64% in May and dropped down to 5th place. GD lost 4.91% last month and dropped out of the top 5 list.
Top 5 Stocks by Average Monthly return since joining the watchlist:
- (BLK) +7.11% (1 month)
- (ATO) +4.52% (6 months)
- (PFG) +3.64% (19 months)
- (BMO) +3.54% (19 months)
- (MTB) +3.23% (19 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 17 full months. It returned 3.95% in May, beating both VYM and NOBL. After this win the portfolio extends its cumulative alpha to 5.85% over VYM and 19.60% over SPY. On an annualized basis the portfolio has a return of 21.58% compared to 17.75% for VYM and 9.09% for SPY.
TOTAL |
Cumulative |
2021 |
2022 |
Annualized |
2022 B&H |
31.90% |
32.97% |
-0.80% |
21.58% |
VYM |
26.05% |
26.21% |
-0.12% |
17.75% |
SPY |
12.30% |
28.76% |
-12.78% |
9.09% |
It is now made up of 42 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 May 31, 2022.
Symbol |
Return |
Alloc. |
AAP |
-6.54% |
1.52% |
AMGN |
16.42% |
6.93% |
ATO |
30.39% |
0.71% |
AVGO |
22.03% |
3.96% |
BBY |
-13.57% |
2.34% |
BEN |
-18.32% |
0.44% |
BK |
13.44% |
0.61% |
BLK |
7.11% |
0.58% |
BMO |
4.47% |
1.13% |
BX |
4.98% |
1.14% |
CMI |
3.19% |
0.56% |
CMA |
14.78% |
1.86% |
CMS |
20.09% |
1.30% |
CSCO |
-12.63% |
0.95% |
DLR |
-0.54% |
1.61% |
DRI |
-12.54% |
2.37% |
DTE |
22.95% |
2.00% |
EPD |
18.31% |
1.28% |
EVRG |
16.83% |
3.16% |
GD |
57.33% |
1.70% |
HBAN |
15.50% |
0.62% |
INTC |
-7.28% |
0.50% |
JPM |
7.07% |
1.16% |
LMT |
29.48% |
4.90% |
MMM |
-13.61% |
7.01% |
MS |
-6.22% |
4.06% |
MTB |
27.36% |
5.51% |
NTRS |
24.75% |
2.03% |
PEP |
18.36% |
2.56% |
PFG |
24.21% |
5.38% |
PGR |
40.66% |
1.52% |
PM |
17.27% |
5.08% |
QSR |
-8.43% |
3.96% |
RY |
17.45% |
3.18% |
SNA |
7.97% |
0.58% |
STT |
4.20% |
1.69% |
TD |
21.12% |
5.90% |
TFC |
-12.20% |
1.90% |
TROW |
-10.24% |
1.94% |
UPS |
-8.27% |
1.49% |
USB |
1.67% |
1.65% |
PARA |
13.54% |
1.23% |
The 2022 buy-and-hold portfolio returned a weaker 2.5% in May and sees its cumulative loss to VYM increase. The portfolio trails VYM by 2.24% during its short 5 month test period, it is however beating SPY by 10.42%. I believe the portfolio will catch-up with VYM and offer alpha in the long…
Read More: My Top 10 High Yield Dividend Stocks For June 2022