The market may be pessimistic about these stocks, but Goldman Sachs says investors should consider them now.
Dividend yielders are getting no respect lately.
In a note from Monday, Goldman Sachs (NYSE: GS) strategists led by Cole Hunter and David Kostin said that the market is pricing in an overly pessimistic level of dividend payouts by U.S. companies.
According to the strategists, the valuation gap between high and low dividend yielders “is now close to the widest it has been in the last 40 years,” with 20% of the S&P 500 companies with the highest dividend yields trading at around half the consensus forward price to earnings ratio of the 20% of the stocks in the S&P 500 with the lowest yields, 11 times compared to 23 times.
This disparity demonstrates the divide between growth stocks, which the market has favored, and value stocks, which haven’t been, made clear by looking at the Russell 1000 Growth Index, which has a five-year annual return of 13.2% compared with 6.9% for the comparable value index.
Swap market prices imply that dividend per share growth will slow from 8% in 2019 to just 1% in 2020. However, Goldman believes earnings per share expansion will accelerate as growth rebounds and “idiosyncratic” headwinds subside, and is forecasting a 6% increase in dividends per share next year and 7% for 2019.
“We find it unlikely that the pace of dividend-per-share growth will slow so dramatically as the pace of earnings growth accelerates,” the strategists wrote in the note.
Goldman says that investors who are seeking yield should look at stocks with strong dividend growth, high yields, and “manageable payout ratios.”
Sectors where analysts are expecting the fastest dividend growth next year include technology, financials, and healthcare, with around 10% growth year-over-year. While the utilities and real estate sectors are expected to see the lowest dividend growth next year at 5%.
For example, the tech sector has become fertile ground for dividend growth, led by Apple (NASDAQ: AAPL), Broadcom (NASDAQ: AVGO), and Microsoft (NASDAQ: MSFT).
According to the firm, names like AbbVie (NYSE: ABBV), Amgen (NASDAQ: AMGN), Omnicom Group (NYSE: OMC), and Starbucks (NASDAQ: SBUX) also fit the bill for dividend growth stocks.