This article is a continuation of a monthly series highlighting the top net payout yield stocks that was started back in June, 2012 (see article) and explained in August, 2012 (see article). The series highlights the best stocks for the upcoming month. Please review the original articles for more information on the net payout yield concept.
Below are two charts highlighting the monthly returns of the top ten stocks from July (see list here). Due to limitations with YCharts, the chart was broken into the Top 5 and Next 5 lists.
The Top 5 stocks had a very subpar July following a couple of good months. Top yielder Seagate Technology (NASDAQ:STX) led the weakness with a 10% loss. The other four stocks had gains that underperformed the large 4.5% gain of the S&P 500. AT&T (NYSE:T), DirecTv (DTV), Kohl's (NYSE:KSS) and American International Group (NYSE:AIG) had average positive returns of 1.6% for the month, but those solid returns weren't enough to match the gain of the S&P 500.
The Next 5 stocks performed substantially better with St. Jude Medical (NYSE:STJ) smashing the market with a gain of over 14%. The other stocks beat the S&P 500 index as well led by over 9% gains from Ameriprise Financial (NYSE:AMP) and O'Reilly Automotive (NASDAQ:ORLY). Both SLM (NYSE:SLM) and Xerox (NYSE:XRX) beat the market with solid gains of 7.4% and 5.0%, respectively.
This month marked a very unusual situation where all the top 5 stocks underperformed and the bottom 5 beat the S&P 500. In total, the list slightly underperformed the market with an average 4.1% gain versus the 4.5% gain by the index. After a month where 80% of the stocks beat the market, it isn't surprising to see numerous stocks struggle. Typically this more conservative group of stocks struggles to match the returns during very bullish months.
The list is full of companies that most investors wouldn't touch when the month began including several left for the dead such as SLM and Xerox.
The list encountered some major changes since the July report due to the bottom stocks again falling off the list from reduced stock buybacks reported for Q2 by O'Reilly Automotive, Xerox and SLM. The major additions were due to significant buybacks over the last couple of quarters by Annaly Capital (NYSE:NLY), Motorola Solutions (NYSE:MSI) and CenturyLink (NYSE:CTL). These stocks benefited from weak stock performance over the last couple of months as the general market has soared helping push other yields lower. Noteworthy as well were the large stock gains by the three stocks dropping off the list. Typically such gains reduce the ability for buybacks to influence the yield naturally pushing investors to sell these stocks at highs and buy the new additions at lows.
The average yields declined as the buyback portion dropped to 7.7% with the continued strong rally in the stock market and the addition of Annaly with a negative buyback. The dividend part nearly doubled to 3.8% as again the addition of the nearly 14% dividend yield of Annaly dramatically shifted the yield landscape. The NPY decreased by nearly 200 basis points to 11.5%.
The strong market gains this year has sent the overall yields plunging. While the stocks on the Top Ten list continue to support yields exceeding 10%, the upper end yields are greatly compressed from numbers that once supported 20% yields. Though the average yield continues to decrease, the yields substantially exceed the now 3-4% yields of the top large cap dividend stocks.
As the Top Ten stocks average buyback yields outside of Annaly maintain levels close to 10%, any market pullback in August would allow the companies to purchase shares at cheaper levels. Even more importantly, these stocks all have the financial resources to increase buybacks if the market was to plunge. A perfect scenario for any long-term investors concerned that the market is extended after hitting record highs.
Disclosure: I am long AMP, CTL, DTV, KSS, MSI, NLY, T. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.