- There are 21 stocks on my high yield watchlist for January 2022.
- The majority of the stocks on my watchlist are currently undervalued based on dividend yield theory.
- An equally-weighted portfolio of these stocks would have returned more than 24% during 2021.
High Yield Stock Watchlist Criteria
The companies listed on this watchlist are stable with a track record of paying and raising their dividends consistently. Each of the companies listed below has a market cap of at least $3 billion. The companies must also have an S&P Capital IQ Earnings and Dividend Ranking of A-, A or A+. This filter helps to establish the company has achieved and should continue to achieve lower price volatility when compared to the broader market.
Next, the current annual dividend yield of the companies on this watchlist is at least 3%. While there could be some debate as to what qualifies a company as "high yield," 3% is sufficient for me. In addition to the 3% yield, a 10-year dividend growth rate of at least 4% is the next filter used.
Companies I invest in for income should be growing their dividend at least at the rate of inflation and the United States inflation rate has not exceeded 4% in more than 30 years (although 2021 may change that). Lastly, a company must be able to maintain a growing dividend for me to consider investing in it, so a trailing twelve-month payout ratio of less than 90% is used as the final filter.
I use dividend yield theory to determine if a stock is potentially undervalued or overvalued. This simple idea suggests a company's yield should revert to the mean over time. An example below is American Electric Power (AEP), the current yield is 3.51% while its five-year average is 3.30%. The difference is 21 basis points or approximately 6%. It is worth noting I consider any stock that is overvalued or undervalued by 5% to be approximately fairly valued, see Principal Financial Group Inc (PFG) below.
|Company||10 Year DGR||Dividend Yield (12/31/21)||Div. Yield(5 Yr Avg.)||Overvalued / Undervalued|
|American Electric Power Company Inc (AEP)||5.20%||3.51%||3.30%||-6%|
|ALLETE Inc (ALE)||3.45%||3.80%||3.19%||-19%|
|Avista Corp (AVA)||4.94%||3.98%||3.26%||-22%|
|Bank of Hawaii Corp (BOH)||4.06%||3.34%||2.84%||-18%|
|Cathay General Bancorp (CATY)||40.97%||3.16%||2.84%||-11%|
|Comerica Inc (CMA)||26.96%||3.13%||2.82%||-11%|
|Evergy Inc (EVRG)||5.00%||3.34%||3.03%||-10%|
|Fidelity National Financial Inc (FNF)||6.94%||3.37%||3.05%||-10%|
|General Mills Inc (GIS)||6.08%||3.03%||3.60%||16%|
|Lockheed Martin Corp (LMT)||14.02%||3.15%||2.65%||-19%|
|3M Co (MMM)||10.84%||3.33%||2.79%||-19%|
|NorthWestern Corp (NWE)||5.84%||4.34%||3.61%||-20%|
|Omnicom Group Inc (OMC)||12.51%||3.82%||3.22%||-19%|
|Principal Financial Group Inc (PFG)||15.08%||3.54%||3.73%||5%|
|Pinnacle West Capital Corp (PNW)||4.23%||4.82%||3.40%||-42%|
|Portland General Electric Co (POR)||4.35%||3.25%||3.08%||-6%|
|Simon Property Group Inc (SPG)||8.72%||4.13%||5.03%||18%|
|Spire Inc (SR)||4.84%||4.20%||3.50%||-20%|
|Southwest Gas Holdings Inc (SWX)||8.47%||3.40%||2.79%||-22%|
|UGI Corp (UGI)||7.11%||3.01%||2.62%||-15%|
|US Bancorp (USB)||13.41%||3.28%||2.63%||-25%|
The goal of my high yield watchlist is to discover companies to add to my dividend growth portfolio in an attempt to consistently exceed the market return of the Vanguard High Dividend Yield ETF (VYM). During 2021, an equally weighted portfolio of these 21 stocks mentioned above would have underperformed the VYM by about 1.8%. VYM gained 26.21% while the stocks above returned 24.39%.
|Symbol||December Returns||YTD Return through Dec.|
Allete Inc. appeared for the first time on the watchlist and is currently undervalued by about 19%. ALE had a negative return for the year losing 176 basis points until December when the stock climbed more than 13% to finish the year up 11.18%. In February we should expect a dividend increase announcement and hopefully it will exceed its 10 year dividend growth average of just 3.45%, the lowest on the watchlist.
Avista Corporation is another company appearing on the watchlist for the first time and is currently undervalued by just over 20%. AVA returned 10.33% during December which basically accounted for all of the returns for the 2021 calendar year as the stock finished 2021 with a return of 10.31%. Avista Corp. boasts a 10 year dividend growth rate of 4.94%, this, paired with one of the higher payout ratios on the watchlist at just over 75% and AVA may find it difficult to land in my portfolio.
This dividend growth watchlist is used to identify companies worthy of further research. Stock prices fluctuate continuously, and although there are legitimate reasons for an increase or decrease, occasionally there are times the market is just overreacting to a short-term issue. I believe if you can identify the reason(s) and determine for yourself if a decline in stock price is justified, you can minimize risk in your portfolio by purchasing a company's stock when their yield is higher than normal.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of AEP 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.
The above-mentioned information should not be construed as investment advice. Every investor's situation is different and you should only invest in a company after doing your own due diligence.
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