This article is a continuation of a series highlighting the top net payout yield stocks that was started in June (see article) and repeated in July (see article). The series is meant to highlight the best stocks for the upcoming month so this report is clearly late. Though with the majority of the month left, it is still worth reviewing last month's results and the updated list as of data from August 10th.
Net Payout Yields Defined
The net payout yield is the combination of the dividend yield and the net buyback yield added together to calculate the yield returned to shareholders. The net buyback yield adds stock repurchases and subtracts shares issued. The yield is calculated using the amount of buybacks over the last four quarters divided by the current market cap.
This study compared the return of the top net payout yield stocks in the Dow to that of the highest dividend stocks (Dogs of the Dow) each year. The surprise winner was the net payout yield stocks that easily beat the market and the highest dividend stocks.
Stone Fox Capital runs a model at Covestor that focuses on this concept. Instead of limiting the model to Dow stocks, it was opened up to any stock with a market cap over $10B. This series focuses on that potential list of stocks.
Below are two charts highlighting the monthly returns of the top ten stocks from July. Due to limitations with YCharts, the chart was broken into the Top 5 and Next 5 lists.
The Top 5 stocks had an exceptional month with only ConocoPhillips (COP) reporting a negative month or a return lower than the 1.1% of the S&P 500 index. Retailers Kolhs (KSS) and Limited Brands (LTD) had exceptional months with gains over 8%.
GS Total Return Price data by YCharts
NOC Total Return Price data by YCharts
With 7 out of 10 stocks beating the market, the list easily outperformed the market. Not to mention, the list is full of retailers, defense, and cable companies that most investors won't touch. These results further highlight the power of picking the top yielding stocks to take the emotion out of investing.
Though the monthly lists typically have minor fluctuations, the August one actually has three new stocks with WellPoint (WLP), AstraZeneca (AZN), and Aetna (AET) added. Not to mention several stocks had large moves within the top ten.
WellPoint in fact jumped to 5th after providing weak guidance for the 2H 2012 while still promising to spend $1.5B on shareholders. Naturally the promise is not used in these calculations, but rather it is another indication of how investors underestimate the cash generation ability of this stock.
AstraZeneca and Aetna joined the list mainly to the below stocks dropping off the list due to reduced yields. Both stocks have solid yields over 15% making them appealing regardless.
As mentioned above, Amgen had a huge gain of 11% in July that pushed it off the list. Also, Gap had a big gain while Time Warner dropped slightly to a 14% yield due to a smaller buyback in Q2 2012 versus the prior year.
The list had some big moves as well with Limited Brands dropping down to 9th following the large gains in July. Motorola Solutions (MSI) jumped to the second spot as the buybacks continue along with management raising the approved amount going forward to $5B.
Top Ten Net Payout Yield Stocks For August
|Company||Buyback Yield (%)||Dividend Yield (%)||NPY (%)|
* data obtained from smartmoney.com.
While investors continue to slam on the buyback component of this model (see comments section from last two articles), the top ten net payout yield stocks easily outpaced the S&P 500 in July.
This list provides great diversity among numerous sectors. Investors should look to investing in these stocks over dividend only stocks as the fiscal cliff and possible tax increases could hit the popular dividend only paying stocks the hardest. Not to mention that the large buyback component of these stocks will be able to take advantage of any major stock selloff.
Additional disclosure: Please consult your financial advisor before making any investment decisions.