According to Goldman Sachs, the time is now ripe for dividend investing. The firm’s chief US equity strategist, David Kostin, writes: “With the 10-year Treasury yield at just 1.5% and the Fed likely to cut two more times this year, investors should look for opportunities in dividend stocks.”
Similarly, in a recent interview with CNBC, Mark Tepper, president and CEO of Strategic Wealth Partners, commented: “As an investor, it’s important to understand that the 30-year yield is pretty much in line with the dividend yield on the S&P 500 right now. So, which would you rather own over the next 10 years?... You’re getting the same yield with a growth component if you invest in stocks.”
For investors looking to pick up some top dividend names, Goldman Sachs screened for stocks with both strong dividend growth and high dividend yields, based on dividend estimates and payout ratios. We used TipRanks to pinpoint three of the most promising stocks on Goldman Sachs’ dividend growth list. As you will see all three of the stocks covered below have a buy consensus from the Street, based on the last three months of ratings:
Telecom giant AT&T is one of the highest yielding dividend stocks singled out by Goldman Sachs. Currently investors receive a lucrative 5.63% yield, which translates to an annualized payout of $2.04 (paid quarterly). For comparison’s sake, the average tech stock manages a dividend yield of just 0.96%. And you can add to the picture extremely compelling dividend growth of 34 consecutive years. That makes T one of the elite Dividend Aristocrats, S&P 500 companies with over 25 years of straight dividend growth.
Such a strong dividend outlook also provides foundation for the company’s share price, which has been on a roll recently. Year-to-date, T has now surged 27% to $36.25. That’s reflected in the fact that the stock’s average analyst price target now falls below the current share price. However, T maintains its Strong Buy analyst consensus. Plus five-star Cowen & Co analyst Colby Synesael has just reiterated his T buy rating with a price target of $40 (10% upside potential).
According to the analyst, shares can continue to grind higher over the coming months. He points out that T is still executing against its 2019 guidance, while potential asset sales (i.e. from the Latin American and tower portfolios) could reduce risk and help pay down debt.
Meanwhile Tigress Financial’s Ivan Feinseth has a Strong Buy rating on T, explaining: “We reiterate our Buy rating on AT&T as positive Business Performance trends continue to accelerate driven by the ramp-up of its high-speed 5G network, and the continued leverage of its WarnerMedia acquisition… We believe significant upside exists from current levels and continue to recommend purchase.” Overall, six out of eight analysts covering the stock rate AT&T a buy right now.
With over 1,100 stores across the US, and annual sales of around $19 billion, KSS is one of the US’s largest retail chains. Although share prices have struggled recently, investors still enjoy an annualized payout of $2.68 (paid quarterly). That’s thanks to eight consecutive years of dividend growth pushing the yield to 5.52% vs the 2.07% services sector average.
In the stock’s favor comes a recent tie up with a major rival- e-commerce giant Amazon (AMZN). On July 8 Kohl’s announced that it now accepts Amazon returns after a successful pilot program. KSS will pack, label and ship the returns for free, but hopes the initiative will “drive customers into our stores, and we are expecting millions to benefit from this service.”
“It’s an interesting marriage because what Kohl’s needs is store traffic, and what Amazon needs is to make customers happier with a place to return their items,” Cowen & Co analyst Oliver Chen commented. “The dream is that it’s a fair but attractive split where that shopper will come in and purchase other items.” He recently reiterated his buy rating on the stock with a $58 price target (19% upside potential).
Writing more recently, Guggenheim’s Robert Drbul reiterated his buy rating following Kohl’s Q2 results. Despite a choppy retail environment, the analyst notes that 1) management has the playbook to drive positive comps in 2H19; and 2) KSS remains best in class at expense management. Plus the analyst adds: “the company remains committed to returning cash to shareholders… and has improved its balance sheet over the past 12-18 months. We continue to view the management team and strategy in place at KSS favorably.”
Given the ongoing highly competitive retail environment, Drbul does lower his KSS price target from $70 to $60. However, from current levels that still indicates upside potential of 24%. Overall, the stock reveals a cautiously optimistic Moderate Buy consensus. It has scored 6 recent buy ratings (including from Goldman Sachs’ Alexandra Walvis- who has a $56 price target on the stock), alongside 4 hold ratings and 1 sell rating.
Last but not least, Goldman Sachs draws our attention to Valero- the world's largest independent petroleum refiner and a leading ethanol producer. From a dividend perspective, VLO offers a high yield of 4.61% with eight years of dividend growth, easily beating the sector’s average yield of 2.54%. Moreover, the annualized payout currently stands at $3.60 (paid quarterly). Indeed, VLO has a very strong program to return capital to shareholders, with $11+ billion returned in 2015–18.
And we can see that the stock boasts only buy ratings from the Street right now. In the last three months, six analysts have published buy ratings on the stock with an average price target of just under $100. For instance, Goldman Sachs’ Neil Mehta upgraded VLO from Hold to Buy three months ago. Citing the stock’s recent underperformance, the analyst also told investors “we expect the company to benefit from increased flows of crude to the US Gulf Coast where much of Valero’s refining capacity is located.” He has a $92 price target on the stock (18% upside potential).
Another analyst singing the stock’s praise is RBC Capital’s Brad Heffern. After the company reported a very standard VLO beat for the second quarter, Heffern wrote “We like Valero Energy for its position at the bottom of the global refining cost curve and its significant leverage to the US Gulf Coast refining market.” However, the analyst did that the 2Q19 bar was relatively low and should have been more easily cleared. His buy rating comes with a $98 price target.
