This article is a continuation of a monthly series highlighting the top net payout yield stocks that was started in June (see article). The series highlights the best stocks for the upcoming month.
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 September (See article here). Due to limitations with YCharts, the chart was broken into the Top 5 and Next 5 lists.
The Top 5 stocks had a slightly disappointing month on a relative basis with both Kohl's (KSS) and Seagate Technology (STX) reporting negative months. On top of that, ConocoPhillips (COP) had a lower return than the S&P 500. On the positive side, Goldman Sachs (GS) and Motorola Solutions (MSI) handily beat the market returns by nearly 4%.
The Next five stocks had a very disappointing month with only AstraZeneca (AZN) beating the market. Both WellPoint (WLP) and Northrop Grumman (NOC) had negative returns while Limited Brands (LTD) slightly underperformed the market. On further review, Nokia (NOK) was determined to not belong in the list, as the data source appears to be incorrectly calculating the yield.
With only 3 out of 9 stocks beating the market, the list underperformed the market after several solid monthly returns. Most disappointing was the three stocks with negative returns while the market was up a solid 2.7%.
After some wild fluctuations the last few months, the October list has very few changes, the main change being the inclusion of Intel (NASDAQ:INTC) in the 10th spot after Nokia was found to not qualify based on invalid data. Besides that, numerous stocks moved a few spots, but no dramatic changes within the list took place.
Goldman Sachs still tops the list even after a 6% gain last month. Not surprisingly though, Seagate Tech jumped to the 2nd position after a 4.4% loss last month. Conversely, Motorola Solutions dropped two spots to 4th after a 6% gain.
Both ConocoPhillips and Kohl's moved two spots on the list yet the yields topped over 20% both months.
Intel joined the list with a 4% dividend and a large buyback. The main reason for making the list is that the stock had a horrible September with a drop of nearly 9% during the month.
The move of Intel into the list brings an interesting concentration from technology with Motorola Solutions and Seagate Tech already on the list. The sector has gone from returning limited cash to shareholders to having some of the highest net payout yields.
Top Ten Net Payout Yield Stocks For October
* Data sourced from SmartMoney.com.
As with any investing model, results can never be guaranteed on a monthly basis. Investing in the top net payout yield stocks has rewarded investors over time. Sometimes monthly results can be disappointing within a good year.
The key to any strategy is sticking to it in the good and bad times. All of these stocks have solid buyback plans making holding onto the plan during a weak month all that easier. This model provides one of the few opportunities in investing to avoid the doubts on whether a stock will bounce back.
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 sell-off.
Disclosure: I am long COP, GS, KSS, MSI, WLP. 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: Please consult your financial advisor before making any investment decisions.