The S&P 500 is down 16% so far in 2022. While investor sentiment is far from bullish these days, Goldman Sachs sees opportunity in one specific group of companies: those that return cash to investors on a regular basis.
“We continue to recommend investors own stocks with high dividend yield and growth,” Goldman’s chief U.S. equity strategist David Kostin writes in a note to clients.
Kostin says strong corporate earnings growth means companies can hike their payouts going forward. And better yet, the market has not priced in that potential.
“The futures market is expecting S&P 500 dividend growth to be negative in 2023 and 2024,” Kostin says. “Looking ahead, our forecast implies 6.7% CAGR dividend growth over the next ten years, significantly above market pricing of 0.4%.”
Kostin’s team has identified several companies that fit this investment theme. Here’s a look at three of them.
*Sign up for our MoneyWise newsletter to receive a steady flow of actionable ideas from Wall Street's top firms.
Gilead Sciences
Gilead Sciences is already one of the more generous dividend-payers from the healthcare sector, currently offering an annual dividend yield of 4.8%. But Goldman sees bigger payouts on the horizon.
The financial juggernaut predicts that by 2023, Gilead’s dividend per share divided by its current price will lead to a yield of 5%.
There’s good reason to be optimistic about this biopharmaceutical company. In Q1, Gilead’s revenue grew 3% year over year to $6.6 billion while adjusted earnings per share increased 4% to $2.12.
It also has a solid cash position of almost $7 billion as of Mar. 31.
Gilead started paying dividends in 2015 with a quarterly payout of 43 cents per share. Today, the company pays 73 cents per share — so the amount has grown by almost 70%.
Best Buy (BBY)
The past few years haven’t been kind to brick-and-mortar stores. So who would have guessed that electronics retailer Best Buy — with more than 1,000 stores in the U.S. and Canada — would be able to deliver the dividend growth that it has of late?
In 2021, the company raised its quarterly dividend by 27% to 70 cents per share. Earlier this year, management announced another 26% quarterly payout increase to 88 cents per share.
While many retailers are still struggling, Best Buy has found its momentum. In the fiscal year ended Jan. 29, the company delivered record revenue and profitability, highlighted by 10.4% same-store sales growth.
The stock currently yields 4.1%. Goldman sees Best Buy continuing its dividend growth streak and offering a yield (based on the current price) of 4.3% in 2023.
Devon Energy (DVN)
With oil and gas prices shooting through the roof, energy stocks have become some of the healthiest dividend payers in the market.
Devon Energy, for instance, recently hiked its quarterly payout by 27% to a record high of $1.27 per share, giving the stock a mouth-watering annual yield of 7.6%. The board also increased the company’s share repurchase authorization by 25% to $2 billion.
In Q1, Devon generated $1.3 billion of free cash flow for the quarter, marking an 18% increase year over year.
Goldman expects prosperity to persist for the oil and gas producer, projecting a dividend yield of 7.8% in 2023 based on the current stock price. That said, it’s important to note that Devon’s dividend consists of a fixed quarterly payout and a variable dividend that includes up to 50% of excess free cash flow.
