High Yield Stock Watchlist - October 2023

High Yield 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 on my watchlist is a large-cap stock, which equates to a market cap of at least $10 billion.

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 5% is the next filter used in hopes to at least keep up with, if not outpace, inflation.

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 100% is used as the final filter.

I use dividend yield theory to determine if a stock is potentially undervalued or overvalued and consequently worthy of further research. This simple idea suggests a company's yield should revert to the mean over time. An example below is Amgen Inc. the current yield is 3.17% while its five-year average is 2.80%. The difference is 37 basis points or approximately 13%, suggesting the stock could be undervalued.

Goal

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). Through September 2023, an equally weighted portfolio of these 20 stocks mentioned above would have underperformed VYM by about 6%, largely due to the market volatility in the Banking sector. VYM has lost 2.34% year to date, while an equally weighted portfolio of the stocks above would have lost 8.81%.

Final Thoughts

This high yield dividend watch list 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.