High Yield Dividend Stocks For May 2021
Summary
- There are 22 high-yield dividend stocks on the May 2021 watchlist.
- The watchlist returned 3.72% in April and is up almost 35% since November 2020.
- The watchlist offers an average dividend yield of 3.38% with a five-year historical dividend growth rate of 10.93%.
Market Recap
High dividend yield stocks finally give way to the S&P 500 in April. VYM finished the month with a 2.55% total return compared to 5.29% for SPY, the S&P 500 ETF. However, since November 1, 2020, VYM is about 491 basis points ahead of SPY and is on pace for to have a great return this year.
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 May 2021, collectively, offer a 3.38% dividend yield and have grown their dividends at a historical rate of 10.93%.
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.
May 2021 Watchlist
Here is the watchlist for May 2021. There are a total of 22 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 2 new stocks. The stocks that have dropped off are: CMS Energy (CMS), Lockheed Martin (LMT), M&T Bank (MTB) and Xcel Energy (XEL). The new stocks added this month are Broadcom (AVGO) and Merck (MRK). The dividend yield and historical yield are shown in the table below are as of 4/30/21.
Symbol | Yield | 5Y Yield | Under/Over |
AMGN | 3.00% | 2.66% | -12.78% |
AVGO | 3.09% | 2.64% | -17.05% |
BMO | 3.60% | 5.47% | 34.19% |
CMA | 3.61% | 2.82% | -28.01% |
CSCO | 2.88% | 2.91% | 1.03% |
DTE | 3.11% | 2.94% | -5.78% |
EVRG | 3.37% | 3.03% | -11.22% |
K | 3.63% | 3.33% | -9.01% |
KMB | 3.44% | 3.19% | -7.84% |
LNT | 2.91% | 2.96% | 1.69% |
MMM | 2.97% | 2.79% | -6.45% |
MRK | 3.53% | 3.09% | -14.24% |
PEP | 2.84% | 2.85% | 0.35% |
PFG | 3.80% | 3.73% | -1.88% |
PM | 5.05% | 5.23% | 3.44% |
RCI | 3.27% | 4.37% | 25.17% |
RY | 3.59% | 5.40% | 33.52% |
SO | 4.05% | 4.54% | 10.79% |
SRE | 3.23% | 2.99% | -8.03% |
TD | 3.63% | 5.14% | 29.38% |
TFC | 3.00% | 3.05% | 1.64% |
WEC | 2.83% | 3.00% | 5.67% |
Average | 3.38% | 3.55% | 4.74% |
Ave-Under | 3.34% | 3.14% | -6.47% |
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.
Closer Look By Sector
The six utility stocks on the watchlist offer an average dividend yield of 3.25%. Southern Company offers the highest current dividend yield of 4.05%, and WEC Energy Group offers the lowest current dividend yield of 2.83%. The average 5 year dividend growth rate of all six utility stocks is a solid 8.85% with Sempra Energy having the highest individual growth rate of 14.33%. DTE Energy, Evergy and Sempra Energy appear to be potentially undervalued based on dividend yield theory. Alliant Energy appears to be potentially fairly valued based on dividend yield theory. Southern Company and WEC Energy Group appear to be potentially overvalued based on dividend yield theory.
The six financial stocks on the watchlist offer an average dividend yield of 3.54%. Principal Financial Group offers the highest current dividend yield of 3.80%, and Truist Financial Corporation offers the lowest current dividend yield of 3.00%. The average 5 year dividend growth rate of all six utility stocks is a solid 11.47% with Comerica having the highest individual growth rate of 27.10%. Comerica and Principal Financial Group appear to be potentially undervalued based on dividend yield theory. Truist Financial Corporation appears to be potentially fairly valued based on dividend yield theory. Bank of Montreal, Royal Bank of Canada and Toronto Dominion Bank appear to be potentially overvalued based on dividend yield theory.
The four consumer staple stocks on the watchlist offer an average dividend yield of 3.74%. Phillip Morris offers the highest current dividend yield of 5.05%, and Pepsi offers the lowest current dividend yield of 2.84%. The average 5 year dividend growth rate of all six utility stocks is a rather low 4.48% with Pepsi having the highest individual growth rate of 7.80%. Kellogg and Kimberly Clark appear to be potentially undervalued based on dividend yield theory. Pepsi and Phillip Morris appear to be potentially fairly valued based on dividend yield theory.
The two information technology stocks on the watchlist offer an average dividend yield of 2.99%. Broadcom offers the better current dividend yield of 3.09% and Cisco offers a lower dividend yield of 2.88%. The average 5 year dividend growth rate of all six utility stocks is a very strong 32.79% primarily due to Broadcom's impressive dividend growth history. Broadcom appears to be potentially undervalued based on dividend yield theory. Cisco appears to be potentially fairly valued based on dividend yield theory.
The two healthcare stocks on the watchlist offer an average dividend yield of 3.26%. Merck offers the better current dividend yield of 3.53% and Amgen offers a lower dividend yield of 3.00%. The average 5 year dividend growth rate of all six utility stocks is a solid 10.89% with Amgen having the better dividend growth history. Both companies appear to be potentially undervalued based on dividend yield theory.
3M is the only industrial stock on the watchlist and offers a current dividend yield of 2.97%. The company has grown its dividend at a rate of 7.48% over the past 5 years. The stock appears to be potentially undervalued based on dividend yield theory.
Rogers Communications is the only communication stock on the watchlist and currently offers a 3.27% dividend yield. The company has grown its dividend at a rate of 5.67% during the last 5 years. The stock appears to be potentially overvalued based on dividend yield theory.
Just because a stock is potentially undervalued based on dividend yield theory does not imply potential upside.
Past Performance
The watchlist from April 2021 had a total return of 3.72% last month, while the fairly valued and undervalued stocks from the watchlist had a total return of 3.07%. Both outpaced VYMs total return of 2.55%, but failed to beat the broad market return, defined by SPY, of 5.29%. Since November 1st, 2020, both the watchlist and the fairly valued and undervalued stocks are outperforming 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% |
Apr 21 | 3.72% | 3.07% | 2.55% | 5.29% |
Cumulative | 34.95% | 35.15% | 32.37% | 28.77% |
The top 3 stocks by total return in April 2021 were:
The bottom 3 stocks by total return in April 2021 were:
Performance by Sector for April 2021
- Communications 6.79% (1 stock)
- Utilities 5.44% (8 stocks)
- Financials +4.95% (7 stocks)
- Industrials +2.65% (2 stocks)
- Consumer Staples +0.87% (4 stocks)
- Information Technology -0.85% (1 stock)
- Healthcare -3.69% (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 returns 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 | 8.98% | 8.97% | 6.94% |
Apr 21 | 3.63% | 3.08% | 2.55% |
Cumulative | 36.84% | 38.27% | 32.37% |
The entire watchlist outperformed the fairly valued and undervalued stocks in April, in the buy and hold mock portfolio, with a return of 3.63%. Both mock portfolios are ahead of VYM on a cumulative basis after 6 months of activity. The goal is to have both remain ahead over the long term. Here are some notable returns from stocks that have dropped off the watchlist but remain in the buy and hold portfolios.
(NTRS) +8.27%
(TRP) +8.13%
(USB) +7.30%
(VIAC) -9.05%
(INTC) -10.11%
ViacomCBS continued to slide downward in April after a very strong start to 2021. The stock remains up about 45% since it was featured on the watchlist in November 2020.
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 EXCEPT CMA, K, MRK. 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.
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