Why Goldman Sachs Enhanced Income Strategy May Be Perfect for 2020

Investing

Published: November 4, 2019 6:50 am

Last Updated: January 30, 2020 1:39 pm

Even though the S&P 500 now sits at all-time highs after over 10 years of a bull market, the venerable index still offers a 1.9% dividend yield and 6% expected dividend growth for 2020. While many would argue that now might not be the time for a huge passive investment in the index, it does make sense to look for strategies that offer multiple ways to generate total return through its biggest and best stocks.

With the Treasury market at close to all-time low yields, and many stocks in the S&P 500 trading at very stretched valuations, Goldman Sachs may have the best strategy for investors for 2020. The firm’s Equity Enhanced Income Strategy portfolio has 23 companies that all have investment grade debt ratings, 90% of the companies have raised their dividends in the past 12 months and 80% have repurchased stocks in that time.

The strategy is to buy shares and then sell covered call options. Combining the call premium income with dividend income and the potential for capital gains gives inventors the potential for total return that may be higher than just owning the shares. With a very rich and fully valued S&P 500, selling calls makes sense, and the worst scenario is the stock is called away at a profit.

We screened the 23 stocks in the portfolio for the companies paying the highest dividends that also have a Buy rating at Goldman Sachs. We found five that look like great ideas now for investors looking to mold a 2020 plan.

Chevron

This integrated giant is a safer way for investors looking to stay or get long the energy sector, and it has big Permian Basin exposure. Chevron Corp. (NYSE: CVX) is a U.S.-based integrated oil and gas company, with worldwide operations in exploration and production, refining and marketing, transportation and petrochemicals.

The company sports a sizable dividend and has a solid place in the sector when it comes to natural gas and liquefied natural gas. Some on Wall Street estimate that the company will have a compound annual growth rate of over 5% for the next five years, though it is among the companies with the largest corporate debt.

With Permian production and asset disposals targets reset, many analysts feel Chevron can raise the dividend 20% and buyback 15% of shares. Last week, Chevron reported adjusted third-quarter earnings that were above the Wall Street consensus estimate. The beat was driven by strong production, which increased by almost 3% from the third quarter of 2018.

Chevron shareholders receive an outstanding 4.10% dividend. The Goldman Sachs analysts have a $137 price target on the shares, nearly in line with the Wall Street consensus target of $137.46. The shares closed Friday’s trading at $116.16 apiece.

Johnson & Johnson

With a diverse product base and very popular and solid brands, this is among the most conservative big pharmaceutical plays. Johnson & Johnson (NYSE: JNJ) is one of the top market cap stocks in the health care sector and will raise the dividend for shareholders this year for the 56th consecutive year. With everything from medical devices to over-the-counter health items and prescription drugs, Johnson & Johnson remains one of the most diversified health care names on Wall Street.

The health care giant also has one of the most exciting pipelines of new drugs in the sector. That combined with the solid over-the-counter product business makes the stock an outstanding holding for conservative accounts with a long-term investment outlook. The company generates a little over half of its sales in international markets, which are expected to see higher spending on health care over the next 10 years and beyond.

The company still faces the public relations nightmare of lawsuits and allegations over the firm’s talcum powder allegedly containing asbestos and causing ovarian cancer. In addition, Johnson & Johnson also faces some opioid litigation, another headline that is keeping investors away.

Shareholders receive a solid 2.90 dividend. The Goldman Sachs price target is $173, which is much higher than the consensus target of $150.24. The shares closed trading at $131.20 on Friday.