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Jan. 25, 2020, 4:41 p.m. EST

This basket of dividend growth stocks can help your portfolio stand out in 2020

These stocks have low price-to-earnings valuations relative to the S&P 500 that also appear likely to continue raising their dividend payouts more quickly than the broad market

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By Philip van Doorn, MarketWatch


Bloomberg
Molson Coors Brewing Co. is among the companies in Goldman Sachs’ “dividend growth basket” of stocks.

Analysts at Goldman Sachs are highlighting a “dividend growth basket” of stocks at a time when valuations for the U.S. stock market have shot up to their second-highest level since June 2002.

In the firm’s recent “U.S. Weekly Kickstart” report Jan. 3, the analysts, led by David Kostin, recommended investors be cautious and look for “growth at a reasonable price,” but also included a group of dividend stocks with low price-to-earnings valuations relative to the S&P 500 /zigman2/quotes/210599714/realtime SPX -3.35%  that also appear likely to continue raising their dividend payouts more quickly than the broader market.

Before taking a deeper dive into the 50 dividend stocks, let’s have a quick refresher of just how pricey the stock market became toward the end of 2019, a year in which the S&P 500 climbed 29% and returned 31.8% with dividends reinvested. Goldman Sachs says 92% of the price appreciation reflects valuation expansion. That means that investors are willing to pay higher prices for stocks, even though earnings growth was very slow last year.

Here are two charts that underline how much more expensive U.S. stocks became during 2019. The first ratio is based on consensus earnings estimates for a rolling 12 months, among analysts polled by FactSet. The second looks back at actual earnings.

First, the forward price-to-earnings ratio for the S&P 500 during the year:


FactSet

Take a longer view, however, and the index’s forward P/E briefly topped that mark at the end of 2017 and early 2019. Otherwise it hasn’t been this high since June 2002.

The second chart shows the trailing price-to-earnings ratio throughout 2019:


FactSet

The dividend basket

The Goldman analysts offered a “sector-neutral” list of 50 stocks that feature “premium yield while positioning for a Value rotation.” That means a shifting of investors’ preference to slower-growing companies whose price-to-earnings ratios are relatively low. According to the analysts, the basket features “a higher dividend yield (3.6% vs. 2.1%), 2x the dividend growth through 2021 (10% vs. 5%), and a much lower P/E multiple (12x vs. 19x),” when compared with the S&P 500.

The basket includes 50 stocks. Here are some smaller lists derived from the basket.

Highest yields

First, here are the 12 stocks in the basket with dividend yields of at least 4%:

Company Ticker Dividend yield Free cash flow yield ‘Headroom’ Total Return - 2019 Forward P/E Ratio
Macy's Inc. /zigman2/quotes/201854387/composite M 9.13% 12.90% 3.76% -38% 6.9
Simon Property Group Inc. /zigman2/quotes/209746667/composite SPG 5.71% 7.30% 1.59% -7% 21.2
Kohl's Corp. /zigman2/quotes/210414114/composite KSS 5.45% 13.67% 8.23% -19% 10.3
AT&T Inc. /zigman2/quotes/203165245/composite T 5.33% 10.03% 4.70% 46% 10.8
AbbVie Inc. /zigman2/quotes/202428675/composite ABBV 5.32% 9.83% 4.51% 1% 9.3
International Business Machines Corp. /zigman2/quotes/203856914/composite IBM 4.82% 10.79% 5.97% 24% 10.2
Seagate Technology PLC /zigman2/quotes/201824240/composite STX 4.41% 6.65% 2.24% 62% 11.2
Molson Coors Beverage Company Class B /zigman2/quotes/205165133/composite TAP 4.27% 10.46% 6.19% 0% 13.4
Broadcom Inc. /zigman2/quotes/200646538/composite AVGO 4.14% 7.09% 2.95% 29% 13.4
Interpublic Group of Cos. /zigman2/quotes/203101491/composite IPG 4.14% 12.47% 8.33% 17% 11.6
Verizon Communications Inc. /zigman2/quotes/204980236/composite VZ 4.07% 7.15% 3.08% 14% 12.3
Huntington Bancshares Inc. /zigman2/quotes/209314988/composite HBAN 4.05% 10.84% 6.79% 32% 11.3
Sources: Goldman Sachs, FactSet
/zigman2/quotes/210599714/realtime
US : S&P US
3,225.89
-111.86 -3.35%
Volume: 2.72B
Feb. 24, 2020 4:20p
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/zigman2/quotes/201854387/composite
US : U.S.: NYSE
$ 15.45
-0.78 -4.81%
Volume: 12.47M
Feb. 24, 2020 4:10p
P/E Ratio
5.00
Dividend Yield
9.77%
Market Cap
$5.01 billion
Rev. per Employee
$197,992
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/zigman2/quotes/209746667/composite
US : U.S.: NYSE
$ 140.78
-1.47 -1.03%
Volume: 3.03M
Feb. 24, 2020 4:10p
P/E Ratio
20.81
Dividend Yield
5.93%
Market Cap
$43.65 billion
Rev. per Employee
$1.13M
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/zigman2/quotes/210414114/composite
US : U.S.: NYSE
$ 43.13
-1.42 -3.19%
Volume: 2.75M
Feb. 24, 2020 4:10p
P/E Ratio
9.91
Dividend Yield
6.21%
Market Cap
$6.98 billion
Rev. per Employee
$156,814
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/zigman2/quotes/203165245/composite
US : U.S.: NYSE
$ 38.05
-0.50 -1.30%
Volume: 34.78M
Feb. 24, 2020 4:10p
P/E Ratio
20.02
Dividend Yield
5.47%
Market Cap
$279.68 billion
Rev. per Employee
$637,332
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/zigman2/quotes/202428675/composite
US : U.S.: NYSE
$ 93.14
-1.82 -1.92%
Volume: 10.68M
Feb. 24, 2020 4:10p
P/E Ratio
17.64
Dividend Yield
5.07%
Market Cap
$140.43 billion
Rev. per Employee
$1.09M
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/zigman2/quotes/203856914/composite
US : U.S.: NYSE
$ 146.43
-3.41 -2.28%
Volume: 5.40M
Feb. 24, 2020 4:10p
P/E Ratio
13.86
Dividend Yield
4.43%
Market Cap
$132.70 billion
Rev. per Employee
$208,845
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/zigman2/quotes/201824240/composite
US : U.S.: Nasdaq
$ 52.04
-2.00 -3.70%
Volume: 3.10M
Feb. 24, 2020 4:00p
P/E Ratio
8.44
Dividend Yield
5.00%
Market Cap
$14.10 billion
Rev. per Employee
$263,814
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/zigman2/quotes/205165133/composite
US : U.S.: NYSE
$ 54.20
-1.09 -1.97%
Volume: 1.71M
Feb. 24, 2020 4:10p
P/E Ratio
48.77
Dividend Yield
4.21%
Market Cap
$11.96 billion
Rev. per Employee
$606,738
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/zigman2/quotes/200646538/composite
US : U.S.: Nasdaq
$ 291.60
-12.90 -4.24%
Volume: 3.65M
Feb. 24, 2020 4:00p
P/E Ratio
45.29
Dividend Yield
4.46%
Market Cap
$121.64 billion
Rev. per Employee
$1.42M
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/zigman2/quotes/203101491/composite
US : U.S.: NYSE
$ 23.96
-0.45 -1.84%
Volume: 3.23M
Feb. 24, 2020 4:10p
P/E Ratio
14.34
Dividend Yield
4.26%
Market Cap
$9.46 billion
Rev. per Employee
$179,896
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/zigman2/quotes/204980236/composite
US : U.S.: NYSE
$ 57.99
-0.21 -0.36%
Volume: 18.12M
Feb. 24, 2020 4:10p
P/E Ratio
12.46
Dividend Yield
4.24%
Market Cap
$240.72 billion
Rev. per Employee
$905,626
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/zigman2/quotes/209314988/composite
US : U.S.: Nasdaq
$ 13.50
-0.41 -2.95%
Volume: 7.30M
Feb. 24, 2020 4:00p
P/E Ratio
10.67
Dividend Yield
4.44%
Market Cap
$14.18 billion
Rev. per Employee
$330,083
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