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 American Electric Power (AEP), the current yield is 3.15% while its five-year average is 3.26%. The difference is 11 basis points or approximately 3%. It is worth noting I consider any stock that is overvalued or undervalued by 5% to be approximately fairly valued, see also American Electric Power below.
|Company||10 Year DGR||Dividend Yield (4/30/22)||Div. Yield(5 Yr Avg.)||Overvalued/Undervalued|
|American Electric Power Company, Inc. (AEP)||4.95%||3.15%||3.26%||3%|
|Amgen Inc. (AMGN)||28.81%||3.33%||2.74%||-22%|
|Best Buy Co., Inc. (BBY)||15.63%||3.91%||2.34%||-67%|
|BlackRock, Inc. (BLK)||11.63%||3.12%||2.29%||-36%|
|Comerica Inc. (CMA)||21.13%||3.32%||3.19%||-4%|
|Evergy, Inc. (EVRG)||5.27%||3.38%||3.12%||-8%|
|Fidelity National Financial, Inc. (FNF)||12.51%||4.42%||3.13%||-41%|
|Home Bancshares, Inc. (HOMB)||23.65%||3.05%||2.43%||-26%|
|Intel Corp. (INTC)||5.92%||3.35%||2.50%||-34%|
|Interpublic Group of Companies, Inc. (IPG)||16.23%||3.56%||3.79%||6%|
|JPMorgan Chase & Co. (JPM)||13.98%||3.35%||2.40%||-40%|
|Leggett & Platt, Inc. (LEG)||4.20%||4.72%||3.58%||-32%|
|3M Co. (MMM)||10.41%||4.13%||2.96%||-40%|
|Morgan Stanley (MS)||26.51%||3.47%||2.24%||-55%|
|NorthWestern Corp. (NWE)||5.59%||4.45%||3.78%||-18%|
|Omnicom Group Inc. (OMC)||10.65%||3.68%||3.47%||-6%|
|Old National Bancorp (ONB)||7.18%||3.69%||2.97%||-24%|
|Prosperity Bancshares, Inc. (PB)||10.70%||3.18%||2.52%||-26%|
|Principal Financial Group, Inc. (PFG)||13.30%||3.76%||3.85%||2%|
|PNC Financial Services Group, Inc. (PNC)||15.36%||3.61%||2.56%||-41%|
|Portland General Electric Co. (POR)||4.87%||3.82%||3.14%||-22%|
|T. Rowe Price Group, Inc. (TROW)||13.29%||3.90%||2.46%||-59%|
|Watsco, Inc. (WSO)||13.08%||3.30%||3.16%||
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 April 2022, an equally weighted portfolio of these 23 stocks mentioned above would have underperformed the VYM by 7.84%. VYM is down 3.52% year to date while the stocks above have lost 11.36%.
|Symbol||April Returns||YTD Return Through April|
Blackrock Inc appeared on the watchlist for the first time and is currently undervalued by 36% based on dividend yield theory. Blackrock has lost more than 31% year to date, good for the second-worst year to date return on the watchlist, only TROW is lower (-37%). The company sports a 10-year dividend growth rate of 11.63%, slightly lower than the watchlist average of 12.82%. Lastly, Blackrock has one of the lower payout ratios on the watchlist at just 31%, leaving a significant amount of room to grow their dividend into the future.
Leggett & Platt Inc also appeared on the watchlist for the first time and is currently undervalued by about 32%. LEG was one of the few stocks on the watchlist to have a positive return in April but is still down year to date. Unfortunately, it also has the lowest 10-year dividend growth rate on the watchlist at just 4.20%.
The last new company I want to bring to your attention is JPMorgan Chase which is undervalued by approximately 40%. It has one of the lowest payout ratios on the watchlist leaving ample room for them to grow their dividend. JPM’s dividend growth rate is nearly 14% over the past ten years.
Additional new companies to the watchlist for this year are Best Buy Co., Inc., Home Bancshares, Inc., Interpublic Group of Companies, Morgan Stanley, Prosperity Bancshares, Inc. and Watsco, Inc.
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.