This article is a continuation of a monthly series highlighting the top net payout yield (NPY) 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 NPY concept.
Below are two charts highlighting the monthly returns of the top ten stocks from May (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 rough May outside of CenturyLink (NYSE:CTL) that gained 7.9% for the month. Seagate Technology (NASDAQ:STX) was the only other stock to beat the benchmark S&P 500 with Annaly Capital (NYSE:NLY) matching the return. Marathon Petroleum (NYSE:MPC) and AT&T (NYSE:T) had losses for the month that greatly underperformed the 2.1% gain for the S&P 500.
The Next 5 stocks had a mixed month in May. Seadrill (NYSE:SDRL) and Motorola Solutions (NYSE:MSI) generated large gains of over 6% that handily exceeded the market. Both Dollar Tree (NASDAQ:DLTR) and Northrop Grumman (NYSE:NOC) had small gains that underperformed the 2.1% gain of the S&P 500 index. Only Pfizer (NYSE:PFE) had a loss for the month.
In all, the top ten stocks performed exactly equal to the market with an average gain of 2.1%. The large gains by CenturyLink and Seadrill more than offset the losses by Pfizer and Marathon Petroleum. Not surprisingly, this more conservative group of stocks struggles to outperform the market during months of strong gains. Without the more volatile stocks of CenturyLink and Seadrill having the strong gains, the portfolio would've had a tough month.
The list encountered several changes since the last update with Marathon Petroleum jumping into the first position and big Apple (NASDAQ:AAPL) joining the list for the first time. Other additions included IBM (NYSE:IBM) and Travelers (NYSE:TRV) on the back of large increases to the buybacks during the first quarter. The most noticeable stock leaving the list was AT&T that had a 12.2% net payout yield prior to reporting a large decrease in the buyback. Dollar Tree and Motorola Solutions both dropped from the list with yields that dropped below 10%.
The average yields were meaningfully lower with the NPY declining to 11.4%. The smallest yield still sits comfortably at 9.9% providing a huge yield to investors compared to government bonds.
The market gains led to lower yields with very few stocks boosting buybacks enough to replace the declining ones. Despite the decline in yields, the constant rotation of weak stocks joining the list and strong stocks falling off the list helps support a relative high yield. The beauty of the concept continues in that investors constantly sell stocks at the top and buy on dips. With the majority of the stocks on the list supporting large buyback yields, the volatile market and fears of a sell off provide more opportunity for cheap buybacks.
Paying attention to the stock buybacks can be an important signal of where management expects the company to go in the next 12 months. Apple is a prime example of how the concept works with the company starting the massive buyback program back in the second quarter last year. The stock traded in the low $400 range at the start of the program and now sits at nearly $650. Traditional NPY investors could've waited until the stock made the top ten position to add the stock to the portfolio or the stock could've been added when it was clear the company was actually going to repurchase a large amount of shares.
Not waiting for the final confirmation via a quarterly filing can help increase returns, but the key remains that the company has to repurchase the shares versus an announcement of a future plan. In the case of Apple, it was clear at the end of 2013 that the company had the cash and the incentive to repurchase shares so it was added to the Stone Fox Capital portfolio at that time. Either way, stock buybacks by large caps continue to reward investors and the above 10 stocks are set to continue doing just that going forward.
Disclosure: I am long AAPL, CTL, DLTR, MSI, NOC, SDRL, T, TRV. 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.