My Top 10 High Yield Dividend Stocks For January 2022
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 39.18% over the past 14 months.
- The watchlist from December returned a nice 7.61% last month, outpacing both VYM and SPY.
Galeanu Mihai/iStock via Getty Images
Market Recap
The stock market rallied to finish 2021 with many stocks setting record monthly returns for the year. The top 10 high yield stocks from December finished the month with a gain of 7.61%. The watchlist generated 87 basis points of alpha over VYM and 299 basis points of alpha over SPY. After a solid final month, the watchlist finishes 2021 10 basis points ahead of VYM but fails to make up enough ground to catch SPY.
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 January 2022, collectively, offer a 3.42% 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 11.30% per year during the last five years. Collectively, all 10 stocks appear to be potentially about 17% 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 focuses 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.
All of the stocks that pass the initial screener criteria are then ranked based on their attractiveness. Further, I sort the stocks in descending order based on their rank and select the top 10 stocks that are forecasted to have at least a 12% annual long-term return.
January 2022 Watchlist
Here is the watchlist for January 2022. There are 2 new stocks that are appearing on the watchlist for the very first time. First up we have Ben Franklin (BEN), a long-time dividend aristocrat that offers a solid current dividend yield of 3.47% and appears to be slightly undervalued. The second newcomer is Best Buy (BBY) with a dividend yield of 2.76% that barely meets the minimum threshold for the watchlist. Best Buy appears to be about 20% undervalued right now and offers a very attractive dividend growth rate paired with a very low payout ratio. The dividend yield and historical yield shown in the table below are as of 12/31/21.
Symbol | Yield | 5Y Yield | Under/Over |
TD | 3.65% | 3.89% | 6.17% |
AMGN | 3.43% | 2.66% | -28.95% |
MTB | 3.13% | 2.38% | -31.51% |
MS | 2.83% | 2.15% | -31.63% |
LMT | 3.17% | 2.65% | -19.62% |
BEN | 3.47% | 3.43% | -1.17% |
VIAC | 3.08% | 1.63% | -88.96% |
PM | 5.30% | 5.23% | -1.34% |
MMM | 3.33% | 2.79% | -19.35% |
BBY | 2.76% | 2.29% | -20.52% |
Average | 3.42% | 2.91% | -17.35% |
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 with the exception of Toronto-Dominion Bank (TD). The stocks are presented in order of how they ranked this month.
Closer Look At Each Stock
Number 1 this month is Toronto-Dominion with a 3.65% dividend yield. Dividend yield theory suggests the stock is potentially about 6% overvalued. The company has a good payout ratio of about 41% and a decent 5-year dividend growth rate of 7.91%. My return forecast is showing a 14.00% potential total annual return for Toronto-Dominion over the next 5 years. This is a combination of forecasted earnings growth, a return to fair valuation and the dividend yield. The stock gained 6.41% in December and has a total return of 80.20% since joining the watchlist in November of 2020. It is one of the best watchlist stocks with an average monthly return of 4.3%.
Number 2 this month is Amgen (AMGN) with a 3.43% dividend yield. Dividend yield theory suggests the stock is potentially about 29% undervalued. It has 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 15.96% 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 rocked a cool 13.12% return in December but has only managed a total return of 7.63% since joining the watchlist in November of 2020. It is one of the worst performing watchlist stocks with an average monthly return of 0.53%. December was a positive sign for the stock as it broke a 5-month streak of consecutive negative returns.
Number 3 this month is M&T Bank (MTB) with a 3.13% dividend yield. Dividend yield theory suggests the stock is potentially about 31.5% undervalued. It has 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 24.62% potential total annual return for M&T Bank over the next 5 years. The stock had a market average gain of 4.75% in December and is up 54.16% since joining the watchlist in November of 2020. It is one of the better watchlist stocks with an average monthly return of 3.14%.
Number 4 this month is Morgan Stanley (MS) with a 2.83% dividend yield. Dividend yield theory suggests the stock is potentially about 32% undervalued. It has 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 17.39% potential total annual return for Morgan Stanley over the next 5 years. Morgan Stanley returned 3.52% in December but is up only 2.96% since joining the watchlist in August of 2021. This equates to a rather low monthly average return of 0.59%.
Number 5 this month is Lockheed Martin (LMT) with a 3.17% dividend yield. Dividend yield theory suggests the stock is potentially about 20% undervalued. It has a good payout ratio of about 49% and a solid 5-year dividend growth rate of 9.77%. My return forecast is showing a 12.24% potential total annual return for Lockheed over the next 5 years. Lockheed gained 6.63% in December but is up only 5.35% since joining the watchlist in November of 2020. It is one of the worse performing stocks on the watchlist with an average monthly return of 0.37%.
Number 6 this month is Ben Franklin with a 3.47% dividend yield. Dividend yield theory suggests the stock is potentially about 1% undervalued. It has a good payout ratio of about 33% and a decent 5-year dividend growth rate of 9.98%. My return forecast is showing a 14.34% potential total annual return for Ben Franklin over the next 5 years. This is the first time the company is appearing on the watchlist, so there are no historical returns to cover.
Number 7 this month is ViacomCBS (VIAC) with a 3.08% dividend yield. Dividend yield theory suggests the stock is potentially about 89% undervalued. It has 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 32.45% potential total annual return for ViacomCBS over the next 5 years. This forecast is predominantly based on the high potential undervaluation. The stock shed 1.7% in December as most other equities rallied. Since joining the watchlist in November of 2020, Viacom is up 8.76%, which equates to a rather low 0.60% average monthly return.
Number 8 this month is Philip Morris (PM) with a 5.30% dividend yield. Dividend yield theory suggests the stock is potentially about 1% undervalued. It has a high payout ratio of about 85% and a rather low 5-year dividend growth rate of 3.22%. My return forecast is showing a 16.60% potential total annual return for Philip Morris over the next 5 years. The stock tacked on a cool 12.03% in December and is up 19.04% since joining the watchlist in March of 2021. This equates to an average monthly return of 1.76% that is respectable but below the watchlist average.
Number 9 this month is 3M Company (MMM) with a 3.33% dividend yield. Dividend yield theory suggests the stock is potentially about 19% undervalued. It has a good payout ratio of about 57% and an average 5-year dividend growth rate of 7.48%. My return forecast is showing a 15.46% potential total annual return for 3M over the next 5 years. The stock added 4.46% to its annual return in December and is up 15.57% since joining the watchlist in November of 2020. This equates to a 1.04% average monthly return that is more than sufficient to meet my 12% annual return target.
Number 10 this month is Best Buy with a 2.76% dividend yield. Dividend yield theory suggests the stock is potentially about 20% undervalued. It has a very good payout ratio of about 25% and a strong 5-year dividend growth rate of 19.56%. My return forecast is showing a 16.65% potential total annual return for Best Buy over the next 5 years. The stock is appearing on the watchlist for the very first time, so there are no historical returns to cover.
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 18 other high yield dividend stocks that passed all of my criteria this month.
Past Performance
The watchlist from December had a total return of 7.61% last month. In the past, I have also tracked the return for just the potentially fairly valued and undervalued stocks. But starting this month, I have opted to track the return of all of the stocks that have appeared on the watchlist. In December, the 50 high yield dividend stocks that have appeared on this watchlist had an average return of 7.89%, slightly outpacing the December watchlist. The watchlist beat both VYM and SPY in December but only managed to surpass VYM on a year-to-date basis. Since inception, November 1st, 2020, the watchlist is slightly beating VYM and slightly underperforming SPY. On an annualized basis, the watchlist has a return of 39.18% through month-end December. 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 in the long term.
Date | Watchlist | ALL | VYM | SPY |
6 months | 8.23% | 7.56% | 8.73% | 11.72% |
3 months | 7.67% | 7.83% | 9.43% | 11.08% |
1 month | 7.61% | 7.89% | 6.75% | 4.63% |
YTD | 26.31% | 27.91% | 26.21% | 28.76% |
Since Inception | 47.07% | 48.93% | 46.51% | 48.06% |
Annualized | 39.18% | 40.70% | 38.73% | 39.99% |
The top 3 stocks by total return in December 2021 were:
The bottom 3 stocks by total return in December 2021 were:
Top 5 Stocks by total return since joining the watchlist:
- (PFG) +93.66% (14 months)
- (CVS) +88.55% (14 months)
- (BMO) +87.92% (14 months)
- (CSCO) +81.66% (14 months)
- (BNS) +80.48% (14 months)
Slight modification here from the prior month, instead of showing the total return 'while on the watchlist', I decided to show the total return 'since joining the watchlist.' These are the 5 stocks that have achieved the highest total return since making their initial appearance on the watchlist.
Top 5 Stocks by Average Monthly return since joining the watchlist:
- (ATO) +16.00% (1 month)
- (AVGO) +5.11% (8 months)
- (PFG) +4.83% (14 months)
- (CVS) +4.36% (14 months)
- (BMO) +4.61% (14 months)
Long-Term Returns
In the past, I tracked how a buy and hold approach would have worked out utilizing the ideas from this watchlist. I think a more useful measure that I plan on sharing going forward is what long-term rate of return each month's watchlist is returning to investors. The watchlist was trimmed to just the top 10 best ideas in November of 2021, so I have decided to start tracking the long-term returns from this point forward. So far, both the November and December 2021 watchlist are on pace to exceed a 12% annual return.
Nov 21 | Dec 21 | |
Return | 6.57% | 7.61% |
Months | 2 | 1 |
Ave Monthly | 3.28% | 7.61% |
Annualized | 46.49% | 55.32% |
I think it'll be useful to see the long-term returns each individual monthly watchlist can produce and how many of them can hit my 12% target annual return.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of ALL WATCHLIST 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.
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