The S&P 500 is down 16% so far in 2022. While investor sentiment is far from optimistic these days, Goldman Sachs sees opportunities in a specific group of companies: those that return cash to investors from regular way.
“We continue to advise investors to own stocks with high dividend yields and growth,” Goldman Chief US Equity Strategist David Kostin writes in a note to clients.
Kostin says strong corporate earnings growth means companies can increase their payouts in the future. And better still, the market has not valued that potential.
“The futures market expects S&P 500 dividend growth to be negative in 2023 and 2024,” says Kostin. “Looking forward, our forecast implies CAGR dividend growth of 6.7% over the next ten years, significantly above the market price of 0.4%.”
The Kostin 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 constant stream of actionable insights from top Wall Street companies.
Sciences of Gilead
Gilead Sciences is already one of the most generous dividend payers in the healthcare industry, currently offering an annual dividend yield of 4.8%. But Goldman sees bigger payouts on the horizon.
The financial giant predicts that by 2023, Gilead’s dividend per share divided by its current price will generate a 5% return.
There are good reasons to be optimistic about this biopharmaceutical company. In the first quarter, Gilead’s revenue grew 3% year-over-year to $6.6 billion, while adjusted earnings per share rose 4% to $2.12.
It also has a strong cash position of nearly $7 billion as of March 31.
Gilead began paying dividends in 2015 with a quarterly payment of 43 cents per share. Today, the company pays 73 cents per share, so the amount has grown almost 70%.
Best Buy (BBY)
The last few years have not been kind to physical stores. So who would have guessed that electronics retailer Best Buy, with more than 1,000 stores in the US and Canada, could generate the dividend growth it has seen 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 pay increase to 88 cents per share.
While many retailers are still struggling, Best Buy has found its momentum. In the fiscal year ending January 29, the company generated record revenue and profitability, highlighted by same-store sales growth of 10.4%.
The stock currently yields 4.1%. Goldman expects Best Buy to continue its streak of dividend growth and deliver a yield (based on current prices) of 4.3% in 2023.
Devon Power (DVN)
With oil and gas prices skyrocketing, energy stocks have become some of the healthiest dividend payers in the market.
Devon Energy, for example, recently increased its quarterly payout by 27% to a record $1.27 per share, giving the stock a luscious 7.6% annual return. The board also increased the company’s share buyback authorization by 25% to $2 billion.
In the first quarter, Devon generated $1.3 billion of free cash flow for the quarter, an increase of 18% year over year.
Goldman expects prosperity to persist for the oil and gas producer, projecting a 7.8% dividend yield in 2023 based on current share prices. That said, it’s important to note that Devon’s dividend consists of a fixed quarterly payment and a variable dividend that includes up to 50% of excess free cash flow.
Sign up for our MoneyWise newsletter to receive a constant stream of actionable insights from top Wall Street companies.
More from MoneyWise
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.