My Top 10 High Yield Dividend Stocks For June 2024

Market Recap

The brief market pullback in April was quickly forgotten in May, the SPDR S&P 500 ETF Trust (SPY) posted a strong gain of 5.06%, fully erasing its 4.03% loss from the prior month. Vanguard’s High Dividend Yield Index Fund ETF (VYM) also posted a good return of 3.03%, not quite enough to cover April’s loss of 3.74%, but a solid month nonetheless. My watchlist faired a little better than both ETFs, with a gain of 5.92%. Year-to-date through May, the watchlist is ahead of both SPY and VYM, with a return of +11.33%, relative to +11.30% for SPY and +8.09% for VYM.

The watchlist’s main purpose is to present me with investment ideas for further review. The process I follow to compile the watchlist focuses on identifying the highest quality stocks with an attractive valuation, and an emphasis on a good starting dividend yield. I track the overall performance of the watchlist to give me an idea of what type of return this stock screening process can deliver. The return is measured against SPY and VYM for a baseline of alternative investment strategies. The goal is also for the watchlist to deliver a long-term CAGR of 12%. Thus far, the watchlist is exceeding this goal with a CAGR of 17.09% after 43 months.

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 relatively safe, reliable, and one that can grow in the future. The top 10 stocks on my watchlist for June 2024, collectively, offer a 3.88% dividend yield that is more than double the dividend yield of the S&P 500. These 10 stocks have also grown their dividends at a historical rate of 9.43% per year during the last five years. Collectively, all 10 stocks appear to be potentially about 33% 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 (35 this month) 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.

June 2024 Watchlist

Here is the watchlist for June 2024. There are four changes from the prior month: Air Products and Chemicals (APD), NextEra Energy (NEE), Royal Bank of Canada (RY) and Texas Instruments (TXN) dropped out and are replaced by Coca-Cola Europacific Partners (CCEP), Evergy (EVRG), Starbucks (SBUX) and Essential Utilities (WTRG). The data shown in the image below is as of 5/31/24.

All of the selected stocks this month appear to be potentially undervalued based on dividend yield theory.

The expected rate of return shown in the last column is computed by taking the current dividend yield plus a return to fair value over the next 5 years and a discounted long-term earnings growth forecast.

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 25 high-yield stocks that passed my initial filters but ranked worse in quality and valuation.

Past Performance

Another “win” in May sees the streak of outperformance relative to SPY and VYM extend to 3 months now. Year-to-date the watchlist is 3.24% ahead of VYM and 0.03% ahead of SPY. Since inception, which was 43 months ago, the watchlist has an annualized rate of return of 17.09%, placing it 1.50% ahead of VYM and 1.09% ahead of SPY.

I do not expect that this watchlist will 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 is performing adequately and remains ahead of target.

In the table below you can see that the watchlist has performed rather well recently, with the 1, 3 and 6-month returns all being significantly better than those for VYM and SPY.

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Individual watchlist returns for May 2024 were:

• Air Products and Chemicals +12.85%
• Comcast (CMCSA) +5.04%
• Alliant Energy (LNT) +3.39%
• NextEra Energy +19.49%
• Royal Bank of Canada +12.85%
• Sirius XM Holdings (SIRI) -3.25%
• Texas Instruments +11.32%
• United Parcel Service (UPS) -4.76%
• WEC Energy Group (WEC) -0.98%
• Essential Utilities +3.20%

Top 5 performing past and present watchlist stocks in May 2024:

1. NextEra Energy +19.49%
2. Best Buy (BBY) +15.18%
3. American Tower Corporation (AMT) +14.09%
4. Corning (GLW) +13.31%
5. Royal Bank of Canada +12.85% (tie)
6. Air Products and Chemicals +12.85% (tie)

Top 5 Stocks by total return since joining the watchlist:

1. Broadcom (AVGO) +215.51% (37 months)
2. Progressive (PGR) +149.57% (40 months)
3. General Dynamics (GD) +147.66% (43 months)
4. Principal Financial Group (PFG) +137.66% (43 months)
5. JPMorgan (JPM) +127.81% (43 months)

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

1. CRH plc (CRH) +4.94% (6 months)
2. Air Products and Chemicals +4.70% (3 months)
3. Discover Financial Services (DFS) +3.72% (9 months)
4. Broadcom (AVGO) +3.15% (37 months)
5. Goldman Sachs (GS) +3.15% (12 months)

In total, there have been 86 unique high-yield dividend stocks that have appeared in the top 10 list during the past 43 months. Out of these 86 unique stocks, 72 have a positive total return since first appearing on the top 10 list. The average total return for these 72 stocks is 40.58%. The average loss for the 14 stocks that have negative total returns is -21.16%. Here are all 86 stocks, their total return since inception, and the number of months since they first appeared in the top 10 list.

*Note that PXD was acquired by XOM during May of 2024, its return shown for the period of its addition to this watchlist through month-end April 2024.

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Closer Look At New Stock

Here’s a closer look at the new stocks this month: Coca-Cola Europacific Partners, Evergy, Starbucks and Essential Utilities.

*Please note that the data shown in the table earlier came from Charles Schwab, while the data shown in the charts below came from Seeking Alpha. Hence, there are some discrepancies.

Let’s start with the 7-year dividend yield theory chart for CCEP.

Here is the historical dividend yield.

And its dividend growth history.

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Here is the 7-year dividend yield theory chart for EVRG.

Here is the historical dividend yield.

And its dividend growth history.

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Here is the 7-year dividend yield theory chart for SBUX.

Here is the historical dividend yield.

And its dividend growth history.

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Here is the 7-year dividend yield theory chart for WTRG.

Here is the historical dividend yield.

And its dividend growth history.

Click to enlarge