Dividend stocks can offer safety in a volatile market. Both Goldman and Bank of America favor them now.
Dividend stocks can offer safety in a volatile market, with plenty providing income that rises like clockwork.
Goldman Sachs strategists say now is a good time for dividend stocks.
“We continue to recommend investors own stocks with high dividend yield and growth,” they wrote in a commentary. “Dividend stocks currently trade at attractive valuations and have historically outperformed during periods of elevated inflation.”
This is certainly a period of elevated inflation, with consumer prices soaring 8.5% in the 12-months through March, a 40-year high.
The strategists recently raised their dividend growth forecast for this year to 10%. “Earnings growth is the primary driver of our dividend forecast,” they said.
Dividend growth generally lags earnings growth. Earnings per share (EPS) soared 47% in 2021, while dividends per share (DPS) rose only 4%, the strategists said.
“Coupled with expected EPS growth of 5% in 2022, should translate into strong dividend growth this year,” they said.
Defining the Basket
They put together a high dividend-growth basket. It has stocks “in each sector with above-average dividend yields and high projected DPS growth, along with moderate payout ratios,” the strategists said.
The list includes
· Omnicom (OMC) – Get Omnicom Group Inc Report, an advertising/marketing company;
· Whirlpool (WHR) – Get Whirlpool Corporation Report, a home appliance company;
· Molson Coors Beverage (TAP) – Get Molson Coors Beverage Company Class B Report, a beer company;
· Pioneer Natural Resources (PXD) – Get Pioneer Natural Resources Company Report, an oil producer;
· Huntington Bancshares (HBAN) – Get Huntington Bancshares Incorporated Report, a bank;
· Merck (MRK) – Get Merck & Co., Inc. Report, a drug company;
· United Parcel Service (UPS) – Get United Parcel Service, Inc. Class B Report, a delivery company;
· Corning (GLW) – Get Corning Inc Report, a specialty glass/ceramics company;
· Packaging Corporation of America (PKG) – Get Packaging Corporation of America Report, a corrugated packaging maker;
· Simon Property Group (SPG) – Get Simon Property Group, Inc. Report, a mall real estate investment trust; and
· NRG Energy (NRG) – Get NRG Energy, Inc. Report, a utility.
BofA’s Positive View on Dividends
Bank of America strategists offered several reasons in a commentary last month as to why they’re bullish on dividend stocks. A partial, edited list of them includes:
1. “In a year for which our S&P 500 target implies the first year of losses since 2018 … total return is paramount. Since 1936, dividends have contributed 36% of total returns,” the strategists said.
2. “Sectors that are positively correlated to inflation, with growing yields, may be the best option in an environment of still scarce yield and inflation risks looming large,” they said. “Note that the sectors that have outperformed this year are higher-yield inflation beneficiaries like energy and materials.”
3. With interest rates soaring, the opportunity cost for stocks versus cash has reversed from prior years,” the strategists said. “Bird-in-the-hand stocks will likely continue to lead.”
4. “High dividend yield has performed well during late cycle regimes, where we still sit,” they said.
The author of this story owns shares of UPS.
