Top 10 High Yield Dividend Stocks For December 2021
Summary
- I present my top 10 High Yield dividend stocks that are poised to offer strong future returns.
- The annualized rate of return for this watchlist is 33.42% over the past 13 months.
- A buy and hold investing approach to the watchlist has performed even better, returning 34.79% on an annualized basis.
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Market Recap
The last few days of November erased all of the early gains for the month. The top 10 high yield stocks from November finished the month with a negative return but they managed to generate alpha over VYM. The collective return of the chosen stocks for November was minus 1.79% while VYM shed 2.31%. The 52 basis points of alpha in November were a positive sign for the watchlist after a very poor showing in October. SPY lost 0.8% during November, outpacing the watchlist by almost a full percent. After a good result in November the watchlist is now less than 1% behind VYM on the year as we enter the final month to bridge the gap. The margin to SPY is nearly 6% and it looks like the watchlist will finish the year trailing the broad index ETF.
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. The top 10 stocks on my watchlist for December 2021, collectively, offer a 3.49% dividend yield that is more than double the dividend yield of the S&P 500. It is also significantly better than the dividend yield of VYM that hovers around 2.7%. These 10 stocks have also grown their dividends at a historical rate of 12.31% per year during the last five years. Collectively, all 10 stocks appear to be potentially about 26% undervalued right now based on dividend yield theory.
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 the 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 trading for bargain prices. The beauty of a long-term outlook is time; you can sit back and wait for the valuation to revert 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: 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.
The watchlist is further trimmed to just the top 10 stocks that are poised to offer the best future total return. I think this is a much more digestible number of stocks for you to review on a monthly basis and it aligns with the stocks that I consider for my personal portfolio from this list.
December 2021 Watchlist
Here is the watchlist for December 2021. There are 4 changes from the prior month: Atmos Energy (ATO), Morgan Stanley (MS), M&T Bank (MTB) and ViacomCBS (VIAC) replace Broadcom (AVGO), Intel (INTC), Lockheed Martin (LMT) and Truist Financial (TFC). The dividend yield and historical yield shown in the table below are as of 11/30/21.
Symbol | Yield | 5Y Yield | Under/Over |
AMGN | 3.46% | 2.66% | -30.08% |
ATO | 2.90% | 2.26% | -28.32% |
DRI | 3.10% | 2.26% | -37.17% |
MMM | 3.36% | 2.79% | -20.43% |
MS | 2.88% | 2.15% | -33.95% |
MTB | 3.15% | 2.38% | -32.35% |
PFG | 3.61% | 3.73% | 3.22% |
PM | 5.72% | 5.23% | -9.37% |
QSR | 3.71% | 2.51% | -47.81% |
VIAC | 2.97% | 1.63% | -82.21% |
Average | 3.49% | 2.76% | -26.30% |
The average dividend yield and historical yield shown in the last line of the table are for all the stocks in the watchlist. This month all of the stocks appear to be potentially fairly valued or undervalued. The stocks are presented in alphabetical order.
Closer Look At Each Stock
Number 1 this month is Amgen (AMGN) with a 3.46% dividend yield. Dividend yield theory suggests the stock is potentially about 30% undervalued. They have a rather high payout ratio of about 89% and a strong 5 year dividend growth rate of 15.16%. My return forecast is showing a 16.20% potential total annual return for Amgen over the next 5 years. This is a combination of forecasted earnings growth, a return to fair valuation and the dividend yield. The stock has appeared on the watchlist for all of the last 13 months and has a total loss of 4.85%. The share price has declined over 17% since July and I have been dollar cost averaging my position.
Number 2 this month is Atmos Energy with a 2.90% dividend yield. Dividend yield theory suggests the stock is potentially about 28% undervalued. They have a good payout ratio of about 49% and a solid 5 year dividend growth rate of 8.27%. My return forecast is showing a 16.74% potential total annual return for Atmos over the next 5 years. This is the first time Atmos Energy has appeared on the watchlist and I am excited to have this dividend aristocrat join the ranks.
Number 3 this month is Darden Restaurants (DRI) with a 3.10% dividend yield. Dividend yield theory suggests the stock is potentially about 37% undervalued. They have a good payout ratio of about 42% and a rather low 5 year dividend growth rate of 4.27%. My return forecast is showing a 42.17% potential total annual return for Darden over the next 5 years. This forecast may seem optimistic as the company has a very high earnings growth forecast. The stock has appeared on the watchlist for the last 4 consecutive months and has a total loss of 4.77%.
Number 4 this month is 3M Company (MMM) with a 3.36% dividend yield. Dividend yield theory suggests the stock is potentially about 20% undervalued. They have a good payout ratio of about 57% and an average 5 year dividend growth rate of 7.48%. My return forecast is showing a 15.83% potential total annual return for 3M over the next 5 years. The stock has appeared on the watchlist for all of the last 13 months and has a total return of 10.64%. The share price has trended downward during the last 6 months shedding nearly 15%.
Number 5 this month is Morgan Stanley with a 2.88% dividend yield. Dividend yield theory suggests the stock is potentially about 34% undervalued. They have a very good payout ratio of about 22% and a very good 5 year dividend growth rate of 20.55%. My return forecast is showing an 18.64% potential total annual return for Morgan Stanley over the next 5 years. Morgan Stanley has appeared on the watchlist twice before in August and September offering strong positive returns during both months. Interestingly enough the stock had negative returns during September and November while off the watchlist.
Number 6 this month is MT Bank with a 3.15% dividend yield. Dividend yield theory suggests the stock is potentially about 32% undervalued. They have a very good payout ratio of about 32% and a good 5 year dividend growth rate of 9.46%. My return forecast is showing a 24.87% potential total annual return for MT Bank over the next 5 years. The stock has appeared on the watchlist for 8 out of the last 13 months with a total return of 30.53%
Number 7 this month is Principal Financial Group (PFG) with a 3.61% dividend yield. Dividend yield theory suggests the stock is potentially about 3% overvalued. They have a very good payout ratio of about 38% and a solid 5 year dividend growth rate of 8.35%. My return forecast is showing a 19.44% potential total annual return for Principal Financial Group over the next 5 years. The stock has appeared on the watchlist for all of the last 13 months and has a total return of 83.62% making it the second best overall stock on the watchlist.
Number 8 this month is Philip Morris (PM) with a 5.72% dividend yield. Dividend yield theory suggests the stock is potentially about 9% undervalued. They have a high payout ratio of about 87% and a rather low 5 year dividend growth rate of 3.22%. My return forecast is showing a 19.86% potential total annual return for Philip Morris over the next 5 years. The stock has appeared on the watchlist for the last 9 consecutive months and has a total return of 6.25%. The share price has declined about 15.5% during the past 3 months pushing the stocks dividend yield near 6% again.
Number 9 this month is Restaurant Brands (QSR) with a 3.71% dividend yield. Dividend yield theory suggests the stock is potentially about 48% undervalued. They have a rather high payout ratio of about 87% and an exceptional 5 year dividend growth rate of 36.43%. My return forecast is showing a 35.03% potential total annual return for Restaurant Brands over the next 5 years. The stock has appeared on the watchlist for last 3 consecutive months and has a total loss of 11.99%. While this is not the start I was hoping for with Restaurant Brands my long term forecast for the company still stands.
Number 10 this month is ViacomCBS with a 2.97% dividend yield. Dividend yield theory suggests the stock is potentially about 82% undervalued. They have a very good payout ratio of about 20% and a good 5 year dividend growth rate of 9.86%. My return forecast is showing a 25.90% potential total annual return for ViacomCBS over the next 5 years. This forecast is predominantly based on the high potential undervaluation. The stock is appearing on the watchlist for only the second time, it was part of the original November 2020 watchlist. It has a very good return while on the watchlist of 23.49% during November of 2020. The stock went on a tremendous ride peaking sometime in Q1 of 2021 but has since plummeted and currently trades for a lower price than on November 1st of 2020. The dividend yield and valuation make sense for me once more so I have added to my position this month already.
Please keep in mind that my return forecasts are based on assumptions and should be viewed as such. I am not expecting that these 10 companies will hit the forecasted returns. But I do believe these 10 companies collectively present a better opportunity going forward than the 22 other high yield dividend stocks that passed all of my criteria this month.
Past Performance
The watchlist from November had a total return of minus 1.79% last month. Since all 10 stocks were potentially undervalued there is no unique return for this subset of stocks this month. The watchlist beat VYM by 0.52% but lost by 0.99% to SPY. Since inception, November 1st, 2020, both the watchlist and the fairly valued and undervalued stocks are underperforming SPY and VYM. On an annualized basis the watchlist trails VYM by about half a percent which is a very narrow margin. My personal target annual return is 12%, so thus far this watchlist has far exceeded my expectations. However the latter part of 2020 and the beginning of 2021 were periods of exceptional returns. While I very much enjoy starting off with a significant cushion I fully expect the annualized rate of return to fall to a more modest level over the long term.
Date | Watchlist | FV/UV | VYM | SPY |
6 month | -1.17% | -1.21% | 0.63% | 9.18% |
3 month | -2.71% | -3.14% | -0.77% | 1.22% |
1 month | -1.79% | -1.79% | -2.31% | -0.80% |
YTD | 17.37% | 16.10% | 18.23% | 23.06% |
Since Inception | 36.66% | 35.96% | 37.25% | 41.51% |
Annualized | 33.42% | 32.79% | 33.94% | 37.78% |
The top 3 stocks by total return in November 2021 were:
The bottom 3 stocks by total return in November 2021 were:
Top 5 Stocks by Total Return since joining the watchlist:
- (BMO) +97.70% (10 months)
- (TD) +83.15% (10 months)
- (PFG) +83.62% (13 months)
- (CSCO) +57.67% (9 months)
- (RY) +55.46% (10 months) NEW
PFG tacked on 3.17% and moves back up to the second best return on the watchlist. TFC shed 5.85% and dropped outside the top 5 list, they are replaced by RY that has not been on the watchlist since October but holds a solid 55.46% return during its 10 month tenure.
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 chart below, you can see the performance summary for equally allocating to all stocks on the watchlist, just the fairly valued and undervalued stocks and finally allocating all capital to VYM. I have also decided to track a buy and hold mock portfolio for the top 10 stocks from each watchlist.
Date | Watchlist | FV/UV | VYM | Top 10 |
6 month | -2.40% | -2.29% | 0.63% | -2.68% |
3 month | -3.11% | -3.38% | -0.77% | -2.22% |
1 month | -2.95% | -2.86% | -2.31% | -3.22% |
YTD | 18.21% | 17.79% | 18.23% | 24.36% |
Since Inception | 37.61% | 38.17% | 37.25% | 53.47% |
Annuazlied | 34.27% | 34.78% | 33.94% | 48.49% |
The entire watchlist buy and hold portfolio lost 2.95% in November, the fairly valued and undervalued buy and hold portfolio finished just about the same losing 2.86%. On a year to date basis the entire watchlist still holds the better return. Both mock portfolios underperformed VYM in November and fall behind the benchmark on a year-to-date basis but not since inception. The goal is to have both portfolios remain ahead of VYM in the long term. The top 10 stocks buy and hold mock portfolio had the worst return in November losing 3.22%. On a year to date basis and since inception the top 10 stocks have a comfortable lead on the other buy and hold portfolios.
As of right now the buy and hold portfolios are performing better than the individual watchlist and the fairly valued and undervalued stocks from the watchlist. This is great to see as a buy and hold approach to investing is not only tax friendly but the easiest to follow.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of ALL STOCKS either through stock ownership, options, or other derivatives. 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.
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