This article is a continuation of a monthly series highlighting the top net payout yield (NYSE: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 utilized in part to make investment decisions for the Covestor model that is now beating the S&P 500 for five out of the last six years. Please review the original articles for more information on the NPY concept.
Below are two charts highlighting the monthly returns of the top 10 stocks from October (see list here). For presentation reasons, the chart is broken into the Top 5 and Next 5 lists.
The Top 5 stocks had a very weak October following a volatile few months. The S&P 500 index produced another solid gain, but Allergan (AGN) held back the top stocks. Investors appetite for the stock soured sending Allergen down 14% and highlights the problems with one-time buybacks versus consistent repurchases on weakness. CBS (CBS) added to the misery for the group with a disappointing 3% loss. Both AIG (AIG) and Corning (GLW) rallied around 5% to offset the weakness in the group while CenturyLink (CTL) had a very small gain. In total, the Top 5 stocks lost 1.3% for October in comparison to the 2.2% gain of the benchmark S&P 500.
The Next 5 stocks had an equally bad month for October following the big gain in September. The nice gains from General Motors (GM) and Discover Financial Services (DFS) weren't enough to offset the large losses in the group. Macy's (M) had a horrible month with a 14% dip while Annaly Capital Management (NLY) and American Airlines Group (AAL) didn't help with sizable losses during a month when the benchmark rose. In total, the Next 5 stocks lost 2.4% for the month, far underperforming the 2.2% gain of the S&P 500.
In all, the top 10 stocks had a weak month led by the massive losses from Macy's and Allergan. In total, the NPY stocks saw a loss of 1.8% in comparison to the 2.2% gain of the benchmark index.
The top 10 list saw large shifts for November. Allergen remained in the top spot on the NPY list with a yield above 20%. Unlike the last couple of months, some of the top yielding stocks saw large drops though the top five yielding stocks remained generally in the top positions.
The big shift in the list was American Airlines Group and Macy's falling off the list with Seagate Tech (STX) rejoining the top 10 and McKesson (MCK) joining for the first time. Both of the stocks dropping off the list saw small pullbacks in yields and remained relatively high above 9%. The two joining the list have recently ramped up stock buybacks enough to get the NPY above 10%.
The average yield slipped as companies generally pull back from stock buybacks and the October weakness won't be reflected in repurchases until after reporting Q4 numbers. For the first time in a while, only two stocks maintained yields above 15%.
The average yield dipped to 12.7% to start November, down from 13.7% to start October. The buyback yield declined to 8.5% due to generally reduced stock buybacks as the market reaches record levels. The dividend yield was nearly flat for the month at 4.2% as the large dividends of Annaly Capital and CenturyLink automatically rise as the stocks dip. The lower-end yield has remained near 10%.
The yields of the NPY concept are now trading at more normal levels after the elevated levels to start the year. The average stock on the list has more sustainable share buybacks and dividends that are more attractive than large, one-time purchases. For this reason, Allergen remains a tough stock to own despite topping the list. Due to a one-time buyback last year that will soon drop off the calculation, the biopharma company isn't aggressively repurchasing the shares as the stock hits new 52-week lows.
The concept took a big hit in October as a couple of stocks took large hits. A list of only 10 stocks are more likely to take wild swings so my previous recommendation holds that investors maintain larger portfolios. For example, an investor has no reason to dump stocks like American Airlines and Macy's that no longer rank in the Top 10, but maintain large yields. Ultimately, the dips provide opportunities for these companies to repurchase cheaper shares that will boost the already attractive yields at levels above 10%.
Disclosure: I am/we are long AIG, AAL, AMP, NLY, CTL, M, GM.
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.