The market rally on Tuesday was a relief from the ongoing stream of negative news, over-the-top political rhetoric, trade tariff saber-rattling and a host of other issues. However, Wednesday showed us just how vulnerable this market is. The fact remains, the president blinked on trade some, and the pressure on equity markets was clearly relieved by moving some of the September 1 tariffs on China to December 15. While kicking the can down the road helps for now, the situation is far from resolved, as Wednesday’s market showed.
One good place for investors to be now in today’s very low interest rate environment is dividend growth stocks, and a new Goldman Sachs research report makes the case that investors are far too pessimistic on the ability of the top companies to continue to grow their dividends.
The report said this:
The S&P 500 currently offers a trailing 12-month dividend yield of 2.0% – higher than the 10-year US Treasury yield for the first time since October 2016. We forecast healthy continued dividend growth and believe the dividend swap market is pricing an overly pessimistic path for dividends, both in 2020 and cumulatively during the next 10 years. Stocks with the highest dividend yields reflect this pessimism and currently trade at the lowest relative valuation in nearly 40 years.
Goldman Sachs is recommending to clients the firm’s Dividend Growth basket, which is a sector-neutral way to own stocks with high dividend yields, strong dividend growth and manageable payout ratios. We picked five stocks with the highest yields, avoiding the dividend proxy sector categories like utilities and real estate.
This is a very solid play for rocky markets and offers a very reasonable entry point. Archer Daniels Midland Co. (NYSE: ADM) is a large agricultural services company with almost $90 billion in sales. It is in the business of converting agricultural harvest such as corn, wheat, soybeans and other products into basic ingredients for both consumer and industrial product manufacturers. Its main business lines focus on oilseed processing, corn processing and agricultural services.
The company reported inline second-quarter results, but management noted optimism from an improved second half related to internal productivity/restructuring actions and the eventual resumption of significant food and agricultural trade between the United States and China. The company expects earnings and returns growth in 2020.
Shareholders receive a 3.71% dividend. The Goldman Sachs price target for the stock is $49, and the Wall Street consensus target is $40.80. Shares closed Wednesday’s trading at $36.77.
This top retailer got hit hard in May and still offers an excellent entry point now. Kohl’s Corp. (NYSE: KSS) operates department stores in the United States that offer private label, exclusive and national brand apparel, footwear, accessories, beauty and home products to children, men and women customers. The company also sells its products online at Kohls.com and through mobile devices.
While retail chains have suffered from internet pressure, Kohl’s has held its own as consumers see the company as a solid discount retailer. In addition, Amazon is growing its partnership with the department store chain. Last summer, the two companies announced that Kohl’s would begin selling Amazon devices, such as the Echo and Fire tablets, at selected stores.
Kohl’s and Amazon announced earlier this summer that all Kohl’s stores would accept free, convenient returns for Amazon customers starting in July. Kohl’s and Amazon first worked together in 2017 to pilot the returns program, which is currently operating in 100 stores in the Los Angeles, Chicago and Milwaukee markets. Kohl’s and Amazon aim to roll out the program to all the more than 1,150 Kohl’s locations across 48 states. It will accept eligible Amazon items, without a box or label, and return them for customers for free, providing additional service and convenience to Amazon customers.
Investors receive a 5.29% dividend. Goldman Sachs has an $83 price target, and the consensus target is $76.31. The stock closed on Wednesday at $45.11, down almost 11% after Macy’s delivered wretched numbers.
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