My Top 10 High Yield Dividend Stocks For May 2024 (2024)

Market Recap

After a solid Q1 in 2024 with the S&P 500 posting positive returns each month, the market cools off to start Q2. The SPDR S&P 500 ETF Trust (SPY) fell by 4.03% in April, erasing nearly 40% of gains this year. Vanguard's High Dividend Yield ETF (VYM) moved in the same direction, falling by 3.74% last month. My watchlist faired a little better, the 10 chosen stocks for April delivered a modest loss of 0.89%, outpacing both SPY and VYM. However, the watchlist trailed both benchmarks in January, and following April slides slightly ahead of VYM but continue to trail SPY year-to-date.

The watchlist's main purpose is to present me with investment ideas for further review. The process used 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 the stock screening process can deliver. The return is measured against SPY and VYM for a baseline of alternative investment approaches. 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 15.61% after 42 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 May 2024, collectively, offer a 3.59% 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 10% per year during the last five years. Collectively, all 10 stocks appear to be potentially about 30% 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 (31 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.

May 2024 Watchlist

Here is the watchlist for May 2024. There are three changes from the prior month: Coca-Cola Europacific Partners (CCEP), Hershey (HSY) and Essential Utilities (WTRG) dropped out and are replaced by Alliant Energy (LNT), Sirius XM Holdings (SIRI) and United Parcel Service (UPS). The data shown in the image below is as of 4/30/24.

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

Past Performance

Building on its positive momentum from March, the watchlist outpaced both benchmarks in April and is quickly improving its year-to-date return, relative to SPY and VYM. Year-to-date the watchlist is now 0.21% ahead of VYM but continues to trail SPY by 0.82%. Since inception, which was 42 months ago, the watchlist has an annualized return of 15.61%, placing it 0.62% ahead of VYM and 0.84% 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.

Individual watchlist returns for April 2024 were:

• Air Products and Chemicals (APD) -2.45%
• Coca-Cola Europacific Partners PLC (CCEP) +2.96%
• Comcast (CMCSA) -11.44%
• Hershey (HSY) -0.30%
• NextEra Energy (NEE) +4.79%
• Royal Bank of Canada (RY) -3.01%
• Texas Instruments (TXN) +1.27%
• WEC Energy Group (WEC) +0.63%
• Essential Utilities (WTRG) -1.27%
• XCEL Energy (XEL) -0.04%

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

1. Hasbro (HAS) +10.95%
2. Kimberly Clark (KMB) +5.55%
3. NextEra Energy (NEE) +4.79%
4. EOG Resources (EOG) +4.07%
5. Campbell Soup Company (CPB) +3.72%

Top 5 Stocks by total return since joining the watchlist:

1. Broadcom (AVGO) +208.81% (36 months)
2. Progressive (PGR) +146.10% (39 months)
3. General Dynamics (GD) +137.18% (42 months)
4. Principal Financial Group (PFG) +129.27% (42 months)
5. JPMorgan (JPM) +115.57% (42 months)

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

1. CRH plc (CRH) +4.71% (5 months)
2. Discover Financial Services (DFS) +4.54% (8 months)
3. FedEx (FDX) +3.21% (19 months)
4. Broadcom (AVGO) +3.18% (36 months)
5. Goldman Sachs (GS) +2.76% (11 months)

In total, there have been 85 unique high-yield dividend stocks that have appeared in the top 10 list during the past 42 months. Out of these 85 unique stocks, 70 have a positive total return since first appearing on the top 10 list. The average total return for these 70 stocks is 38.00%. The average loss for the 15 stocks that have negative total returns is -21.10%. Here are all 85 stocks, their total return since inception, and the number of months since they first appeared in the top 10 list.

Closer Look At New Stock

Here's a closer look at the new stocks this month: Alliant Energy, Sirius XM Holdings and UPS.

Let's start with the 7-year dividend yield theory chart for LNT.

Here is the historical dividend yield.

And its dividend growth history.

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

Here is the historical dividend yield.

And its dividend growth history.

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

Here is the historical dividend yield.

And its dividend growth history.

Dividend Yield Theorist