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.
ADM
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.
Kohl’s
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.
Regions Financial
Many investors are familiar with this larger regional banking play. Regions Financial Corp. (NYSE: RF) is one of the nation’s largest full-service providers of consumer and commercial banking, wealth management, mortgage and insurance products and services. It serves customers across the South, Midwest and Texas, and through its subsidiary, Regions Bank, operates approximately 1,500 banking offices and 1,900 ATMs.
The company’s lending portfolio focuses primarily on residential mortgages, home equity, commercial mortgage and commercial and industrial loans. These short-term loans may have an interest rate based on the LIBOR rate or prime rate and are secured by collateral owned by the business requesting the loan.
Investors receive a 4.34% dividend. The $17 Goldman Sachs price target compares with the $17.42 consensus target. The shares closed most recently at $13.66
Valero Energy
This Wall Street and Goldman Sachs favorite is a solid play for conservative balanced accounts. Valero Energy Corp. (NYSE: VLO) is the largest independent petroleum refining and marketing company in the United States. It is based in San Antonio, Texas; owns 13 refineries in the United States, Canada and Europe; and has total throughput capacity of around 2.5 million barrels per day.
Valero also is a joint venture partner in Diamond Green Diesel, which operates a renewable diesel plant in Norco, Louisiana. Diamond Green Diesel is North America’s largest biomass-based diesel plant.
Valero sells its products in the wholesale rack or bulk markets in the United States, Canada, the United Kingdom, Ireland and Latin America. Approximately 7,400 outlets carry Valero’s brand names.
Investors receive a 4.57% dividend. The Goldman Sachs price target is $92. The consensus target is much higher at $101.75, and shares were last trading at $76.00.
Verizon
This top telecommunications company offers tremendous value. Verizon Communications Inc. (NYSE: VZ) is a global leader in delivering the digital world. Verizon Wireless operates America’s self-described most reliable wireless network, with 109.5 million retail connections nationwide.
Verizon also provides converged communications, information and entertainment services over America’s most advanced fiber-optic network, and it delivers integrated business solutions to customers worldwide.
Verizon investors receive a 4.32% dividend. Goldman Sachs has set a $67 price target. The consensus target is $59.95, and shares closed at $56.72.
These five top picks from the Goldman Sachs Dividend-Growth basket not only are priced right but pay dependable dividends. We are clearly in a vulnerable market, and while the economy is still good, indicators have slowed, the August volatility and doldrums are upon us, and the geopolitical and domestic political arenas remain very volatile.
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