My Top 10 High Yield Dividend Stocks For July 2022 (2024)

Market Recap

Here we go again, down that is, the S&P 500 had its second worst month this year and finished June with a loss of 8.25%, as measured by SPY. My watchlist did not perform any better as the 10 chosen stocks for June lost a collective 10.24%. However since inception, November 2020, the watchlist remains 4.58% ahead of SPY. My other benchmark, VYM, also had a lousy June losing 7.86%, it did perform much better than the watchlist and remains 4.35% ahead since inception. SPY is down 19.98% this year through month-end June, my watchlist is performing much better with a loss of only 13.81% but it trails VYM that is down just 7.97%.

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 July 2022, collectively, offer a 3.94% 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 2.5%. These 10 stocks have also grown their dividends at a historical rate of 21.82% per year during the last five years. Collectively, all 10 stocks appear to be potentially about 39% 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 focuses 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 quality and valuation. Further, I sort the stocks in descending order based on the best combination of quality and value and select the top 10 stocks that are forecasted to have at least a 12% annual long-term return.

July 2022 Watchlist

Here is the watchlist for July 2022. There are no changes from the prior month except for a reshuffling in the order of best ranked stocks. The data shown in the image below is as of 6/30/22.

All 10 selected stocks this month appear to be potentially undervalued based on dividend yield theory. However the potential undervaluation for Advance Auto Parts (AAP) is misleading because of the very fast dividend growth during the past couple years. I believe the company looks attractive at its current valuation but it is not 85% undervalued as dividend yield theory suggests.

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. What I do expect is that these 10 companies have the potential to offer better returns during the next 5 years compared to the 31 high yield stocks that passed my initial filters but ranked worse on quality and valuation.

Past Performance

The June watchlist lost 10.24% last month bringing the year-to-date return for the watchlist to minus 13.81%. For comparison purposes VYM, Vanguards high yield ETF, is down 7.97% this year and SPY, S&P 500 ETF, is down 19.98%. Following the poor results in June the annualized return for the watchlist falls from 24.36% to 15.29%. The gap to VYM widens from 2.83% to 4.35% (annualized return is 19.64%). And the gap to SPY shrinks form 6.83% to just 4.58%. I do not expect that this watchlist beat VYM or SPY every month, however, I believe that a buy-and-hold investing approach leveraging the stocks presented on this watchlist will generate long term alpha compared to the broad market. I also have a personal target rate of return of 12% that I believe will be attained by this watchlist when measured over long periods of time.

Thus far the watchlist has exceeded my expectations and I believe it will continue to do so in the long run.

Individual watchlist returns for June 2022 were:

• (UPS) +0.16%
• (QSR) -3.43%
• (DLR) -6.08%
• (AAP) -8.01%
• (BLK) -8.31%
• (TROW) -9.61%
• (MS) -11.70%
• (MMM) -13.32%
• (BBY) -19.55%
• (BX) -22.55%

Top 5 Stocks by total return since joining the watchlist:

1. (PFG) +82.18% (20 months)
2. (GD) +75.74% (20 months)
3. (CVS) +71.14% (20 months)
4. (BMO) +70.99% (20 months)
5. (MTB) +62.10% (20 months)

PFG lost 7.6% in June but holds on to first place. GD lost 1.07% in June but jumps into the second place in turn knocking out TD from the top 5 list. CVS lost 4.23% in June but moves up from 5th to 3rd place surpassing MTB and BMO. BMO, the long term leader, drops again after June falling into 4th place after losing 11.68% during the month. MTB lost 11.44% in June and slides down into 5th place.

Top 5 Stocks by Average Monthly return since joining the watchlist:

1. (ATO) +3.32% (7 months)
2. (PFG) +3.04% (20 months)
3. (GD) +2.86% (20 months)
4. (CVS) +2.72% (20 months)
5. (BMO) +2.72% (20 months)

Buy-And-Hold Portfolios

The buy-and-hold portfolios are a more useful measure of how a long term investing approach utilizing this watchlist could perform. I started tracking one for 2022 and one since 2021. Both buy-and-hold portfolios invest an equal amount each month into all 10 chosen high yield stocks, the positions are never sold and all dividends are reinvested back into the issuing stock.

Here's a quick breakdown of how each portfolio is performing.

The 2021 buy-and-hold portfolio has now been around for 18 full months. It lost 9.13% in June, underperforming both VYM and NOBL. In spite of this loss, the portfolio maintains cumulative alpha of 3.71% over VYM and 16.82% over SPY. On an annualized basis the portfolio has a return of 12.83% compared to 10.49% for VYM and 2.01% for SPY.

It is now made up of 42 unique high yield dividend stocks. Below is a table of all of the positions, the cumulative return for each component and the allocation as of June 30, 2022.

The 2022 buy-and-hold portfolio performed worse in June losing 10.48%. The portfolio trails VYM by 4.62% after 6 months but is outperforming SPY by 7.39%. I believe the portfolio will catch-up with VYM and offer alpha in the long run.

As of month end June it includes 23 unique high yield dividend stocks. Below is a table of all of the positions, the cumulative return for each component and the allocation as of June 30, 2022.

Two benefits these portfolios offer over VYM and SPY are a higher starting dividend yield and a more spaced out dividend payout schedule. The 2021 buy-and-hold portfolio is performing very well thus far and the 2022 portfolio hasn't been around long enough to be properly evaluated.

I believe that a buy-and-hold investing approach is the best strategy for all dividend investors. If you apply this strategy targeting quality companies trading for attractive prices you will achieve better than average results in the long run.

Dividend Yield Theorist