High Yield Dividend Stock Watchlist For April 2021
Summary
- High Yield Dividend Stocks outperform SPY during March 2021 by 240 bps.
- There are 24 high-yield stocks on the April 2021 watchlist, with 1 new addition this month.
- The watchlist returned 10.68% during March 2021 and is now up more than 30% since November of 2020.
Market Recap
High dividend yield stocks continue to see strong performance in March 2021. VYM, Vanguards high dividend yield ETF, outpaced SPY by 240 bps last month with a total return of 6.94%. Year-to-date VYM is 484 bps ahead of SPY with a total return of 11.19%. As high yield stocks continue to enjoy a brief moment of outperformance, finding sufficiently high dividend yields is becoming more difficult. The number of stocks on my watchlist has started to trend downward but remains in the mid 20s.
The main purpose of a high dividend yield portfolio is not to outperform the broad market, but to generate a passive income stream that is safe, reliable and one that can grow in the future. Stocks on my watchlist for April 2021, collectively, offer a 3.35% dividend yield and have grown their dividends at a historical rate of 8.88%.
The best way to create a strong high yield dividend portfolio is with a buy and hold strategy. This strategy forces you to think about the stocks you decide to invest your capital into as the plan is to hold the positions indefinitely. Applying this approach over a long-term, while focusing on potentially undervalued stocks, allows investors to generate alpha through capital appreciation. While this may not pan out for every position, diversifying your high yield portfolio across 20 or more unique stocks will increase the odds of picking up shares of certain stocks when they are at bargain prices. The beauty of a long-term outlook is time, you can sit back and wait for the valuation to revert back to historical norms all the while collecting a generous passive income stream.
Watchlist Criteria
Creating the high yield watchlist I had four areas of interest that I focused on, they are: basic criteria, safety, quality and stability. First off, the basic criterion aims to narrow down the list of stocks to those that pay a dividend, offer a yield above 2.75% and trade on the NYSE and NASDAQ. The next set of criteria focus on safety because that is a crucial part of a high yield investing strategy. The filter excludes companies with payout ratios above 100% and companies with negative 5-year dividend growth rates. Another level of safety can be associated with larger companies therefore the watchlist narrows in on stocks with a market cap of at least $10 billion. The next set of criteria set out to narrow down the list to include higher quality businesses. The three filters for quality are: a wide or narrow Morningstar moat, a standard or exemplary Morningstar stewardship and an S&P quality rating of B+ or higher. A Morningstar moat rating represents the company's sustainable competitive advantage, the main difference between a wide and narrow moat is the duration that Morningstar expects that advantage to last. Companies with a wide moat are expected to maintain their advantage for the next 20 years, whereas companies with a narrow moat are expected to maintain their advantage for the next 10 years. The Morningstar stewardship evaluates the management team of a company with respect to shareholders' capital. The S&P quality rating evaluates a company's earnings and dividend history. A rating of B+ or higher is associated with above average businesses. The last set of criteria focus on the stability of a company's top-line and bottom-line growth. The filter eliminates companies with negative 5-year revenue or earnings per share growth rate. I believe a company that is growing both their top-line and bottom-line has the ability to provide growth to its investors in the future.
April 2021 Watchlist
Here is the watchlist for April 2021. There are a total of 24 unique dividend stocks all with a current dividend yield of 2.75% or more. 4 stocks have dropped off from the prior months watchlist, they are replaced by just 1 new stock. The stocks that have dropped off are: CVS Health (CVS), Northern Trust (NTRS), Progressive (PGR) and State Street (STT). The new stock added this month is Comerica Inc. (CMA). The dividend yield and historical yield are shown in the table below are as of 3/31/21.
Symbol | Yield | 5Y Yield | Under/Over |
AMGN | 2.82% | 2.66% | -6.02% |
BMO | 3.74% | 5.47% | 31.63% |
CMA | 3.77% | 2.82% | -33.69% |
CMS | 2.85% | 2.76% | -3.26% |
CSCO | 2.86% | 2.91% | 1.72% |
DTE | 3.25% | 2.94% | -10.54% |
EVRG | 3.60% | 3.03% | -18.81% |
K | 3.58% | 3.33% | -7.51% |
KMB | 3.30% | 3.19% | -3.45% |
LMT | 2.81% | 2.65% | -6.04% |
LNT | 2.97% | 2.96% | -0.34% |
MMM | 3.04% | 2.79% | -8.96% |
MTB | 2.86% | 2.38% | -20.17% |
PEP | 2.87% | 2.85% | -0.70% |
PFG | 3.69% | 3.73% | 1.07% |
PM | 5.37% | 5.23% | -2.68% |
RCI | 3.36% | 4.37% | 23.11% |
RY | 3.69% | 5.40% | 31.67% |
SO | 4.16% | 4.54% | 8.37% |
SRE | 3.34% | 2.99% | -11.71% |
TD | 3.82% | 5.14% | 25.68% |
TFC | 3.06% | 3.05% | -0.33% |
WEC | 2.90% | 3.00% | 3.33% |
XEL | 2.77% | 2.87% | 3.48% |
Average | 3.35% | 3.46% | -0.17% |
Ave-Under | 3.25% | 3.06% | -6.56% |
The average dividend yield and historical yield shown in second to last line of the table are for all the stocks in the watchlist. The last line, "Ave-Under", shows the average data for all stocks that are no more than 5% overvalued as computed using dividend yield theory.
Valuation
If you're unfamiliar with the dividend yield theory valuation method, it is quite simple. You compare the current dividend yield to the historical dividend yield, the table above uses a 5-year historical yield, and if the current yield is above the historical yield, the stock is potentially undervalued and vice versa. Like any other valuation method, this is only an approximation of valuation and further due diligence is warranted.
Let's take a closer look at the 1 new stock on this month's watchlist.
CMA has recovered nicely since the March 2020 low that brought the share price to its lowest point during the past 5 years. The stock remains about 30% below its 5 year all-time high, although in the chart below we can see the share price started trending downward in late 2018. The current dividend yield of 3.79% is well above the average historical dividend yield suggesting the stock may have potential upside in the future.
Just because a stock is undervalued based on the dividend yield theory in itself does not imply potential upside.
Past Performance
The watchlist from March 2021 had a total return of 10.68% last month, while the fairly valued and undervalued stocks from the watchlist had a total return of 11.09%. Both outpaced VYMs total return of 6.94%, and the broad market return, defined by SPY, of 4.54%. Since November 1st, 2020, both the watchlist and the fairly valued and undervalued stocks are ahead of the broad market and VYM.
Date | Watchlist | FV/UV | VYM | SPY |
Nov 20 | 13.29% | 13.75% | 12.26% | 10.88% |
Dec 20 | 2.78% | 2.95% | 3.41% | 3.71% |
Jan 21 | -1.27% | -1.17% | -0.57% | -1.02% |
Feb 21 | 2.26% | 1.98% | 4.57% | 2.78% |
Mar 21 | 10.68% | 11.09% | 6.94% | 4.54% |
Cumulative | 30.11% | 31.13% | 29.08% | 22.30% |
The top 3 stocks by total return in March 2021 were:
The bottom 3 stocks by total return in March 2021 were:
Performance by Sector for January 2021
- Information Technology +15.24% (1 stock)
- Utilities 13.99% (8 stocks)
- Industrials +11.88% (1 stock)
- Healthcare 10.52% (2 stocks)
- Consumer Staples 9.37% (4 stock)
- Financials +8.44% (10 stocks)
- Communications 7.50% (1 stock)
Buy and Hold Approach
Since I practice a buy and hold approach with my personal investments I thought it would be useful to see how that approach would perform using this watchlist. The premise is simple, each month you allocate an equal amount of capital to all stocks from the watchlist and hold that position for the long-term. In the image below you can see the monthly and cumulative return for equally allocating to all stocks on the watchlist, just the fairly valued and undervalued stocks and finally allocating all capital to VYM.
Eq Alloc | Under | VYM | |
Nov 20 | 13.29% | 13.75% | 12.26% |
Dec 20 | 2.76% | 3.12% | 3.41% |
Jan 21 | -0.59% | -0.22% | -0.57% |
Feb 21 | 4.70% | 5.17% | 4.57% |
Mar 21 | 8.19% | 8.06% | 6.94% |
Cumulative | 31.09% | 33.02% | 29.08% |
Even though the watchlist underperformed the fairly valued and undervalued stocks during March, under the buy and hold approach it had the best return of 8.19%. Here are some notable returns from stocks that have dropped off from the watchlist but remain in the buy and hold portfolios.
(BK) +12.17%
(USB) +11.45%
(GD) +11.07%
(TRP) +10.74%
(VIAC) -29.89%
ViacomCBS has been on a strong run this year but has finally peaked and shed almost 30% last month. The stock remains almost 60% up since they were featured on this watchlist.
Both the watchlist and fairly valued and undervalued stocks surpass VYM after the strong returns during March, building a comfortable lead of 201 bps and 394 bps respectively.
Video
If you'd like to see more information for each of the stocks on this month's watchlist you can check out the video below.
This article was written by
Analyst’s Disclosure: I am/we are long ALL STOCKS EXCEPT CMA, CMS, K, PM, XEL. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.