Traders work on the floor of the New York Stock Exchange.
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In a falling rate environment, Goldman Sachs is advising clients to buy high-dividend payers, which are trading at their cheapest levels relative to low-dividend payers in nearly 40 years, according to the firm.
“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,” David Kostin, Goldman’s chief U.S. equity strategist said in a note on Friday.
Investors have piled into safe-haven Treasurys recently, pushing bond yields to their historic lows last week as stocks sold off. If the market remains shaky in the face of a slowing global economy and the intensified trade war, investors may look to stocks with more steady dividend income, according to Goldman.
The market is pricing in “an overly pessimistic” level of dividend payouts with the swap-market prices implying merely 0.7% growth over the next decade, Kostin pointed out. Additionally, the valuation gap between high- and low-dividend-yield stocks is close to the widest it has been in the last 40 years, the strategist said.
However, the reality is that U.S. companies are growing dividends steadily with the S&P 500 dividends rising by 9% in the first and second quarters this year, the strategist said. Goldman predicted the S&P 500 annualized dividend growth to be 3.5% during the next decade.
Goldman screened stocks with strong dividend growth and high dividend yields, based on their dividend estimates and payout ratios. The average stock in its basket has a dividend yield of 3.8% versus 2.1% for the typical S&P 500 stock.
AT&T, Kohl’s and data storage company Seagate Technology all sport a dividend yield of about 6% and make the Goldman list of about 50 stocks. Food processing company Archer-Daniels Midland, Citizens Financials and real estate company Simon Property Group are also among those big dividend growers.