U.S. Markets closed

Buy Dividend Stocks, says Goldman Sachs

Earlier this month, the yield curve inverted. That is, the 10-year treasury bond yield slipped lower than the 2-year bond yield. It’s a switch that spooked the markets, signaling as it does that investors are losing confidence in short term gains and require higher yields to buy shorter term bonds. It’s also a switch that has preceded, sometimes by even a year or more, every recession for the last half-century, and so it brought the dreaded R-word back into investors’ discourse. That’s an article for another day, however.

Instead, we’ll focus on a recent comment from Goldman Sachs analyst David Kostin , who in a succinct observation pointed out a more immediate problem and a possible solution for return-minded investors: “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.” A move toward high-paying dividend stocks would give investors an alternative to lower bond yields, as well as a cushion against lower share price gains. Goldman has a basket of such stocks.

So, for investors interested in faster returns, here are three buy-rated stocks that reliably pay out a high dividend.

AT&T, Inc. ( T )

AT&T has been persistently cheap since the Great Recession of 2008. The stock dropped below $30 per share then, and has been unable to break above $40 ever since. Shares are trading now at $34, with a 2018 PE ratio of 9.07 and an estimated 2020 PE of just 8.72. So not only is it cheap, it’s expected to stay cheap. But is that a realistic forecast?

After all, we’re talking about the world’s largest telecom company. It’s the largest landline phone company and largest mobile service provider in the US, and last year purchased WarnerMedia as the foundation for a content-based streaming service scheduled to go online later this year. The stock may be cheap, but the company has enormous assets and plenty of future profit potential.

And it is consistently one of the S&P 500’s top dividend payers, with a yield of 5.83% and a current annualized payout of $2.04 per share. The company’s cash flow is net positive, and management has been able to maintain that dividend payout while incurring the debt necessary to acquire WarnerMedia and its content, and cover the interest. It’s an impressive performance.

Looking ahead, AT&T appears ready to cash in on its profit potential. 5G is coming, and wireless providers are going to benefit – as the largest such provider in the American market, T is likely to gain proportionately, at least. The same is likely to happen as the streaming sector opens up. With its large body of mobile customers, AT&T has a built-in audience for entertainment streaming via smartphone.

The gains may have already begun. 5-star analyst Colby Synesael , from Cowen, looked at T after its recent quarterly earnings release and wrote, “The company is meeting and/or beating revenue and earnings for each segment except International. AT&T is on pace to meet and/or exceed its 2019 guidance.” He raised his price target by 17.6%, to $40. His new PT suggests an upside of 14%, in line with his upbeat outlook.

AT&T gets a Strong Buy rating from the analyst consensus, with 7 buys and 2 hold given in recent months. As noted, shares are selling for $34.98. The average price target, $36.14, implies a modest upside potential of 3.3%, but don’t be surprised to see that increase in the near future. This stock is resting on fundamental strengths.

Citigroup, Inc. ( C )

Unlike AT&T above, Citigroup hasn’t been dealing with headwinds lately. In fact, the banking giant has shown consistent growth in revenue and earnings for the last 5 years, while streamlining for efficiency. In 1H19, revenues gained a respectable 4% while net income rose even faster, 13%.

At the same time, Citi’s forward PE ratio is only 8.8, and is expected to drop as low as 6.9 by the end of 2021. These numbers, for a globe-spanning banking conglomerate, indicate a stock that is a serious bargain by any standard.

With a relatively cheap share price, Citi has been making itself more attractive to investors by a combination of consistent dividend payouts and recent dividend increases. Over the past two years, Citi has boosted its dividend by almost 60%. For investors, that’s a gift, even if it’s not part of Goldman’s dividend basket. Citi shares are now yielding 3.22%, and give an annualized payout of $2.04. This easily beats money market accounts, and if the Fed lowers rates again as expected, the disparity will only make the dividend more attractive.

Even better, Citi is well positioned to continue increasing the yield. Despite the recent rate cut and falling bond yields, Citi has seen growth in the core business of deposits and loans, generating cash and float for investment – and dividend payments.

Wall Street’s analysts agree that C shares are investment-grade. Last month, Brian Kleinhanzl of KBW upgraded his call on the stock, bumping it to Buy, and raised his price target 16% to $86. More recently, Betsy Graseck from Morgan Stanley and Mike Mayo from Wells Fargo also gave Buy ratings to C, with price targets of $78 and $85.

Overall, C has a Strong Buy on the analyst consensus, with 9 recent buy ratings and 1 sell. Shares are trading for $63.91, the average price target is $79.20, and the upside potential is 24%.

Kohl’s Corporation ( KSS )

Kohl’s, the department store chain, reported earnings on Aug 20, and the results showed a somewhat mixed bag. On the negative side, EPS dropped nearly 20 cents from the year-ago quarter and revenues slipped $140 million, to $4.43 billion, over the same period. These were not results to inspire confidence.

On the positive side, however, the $1.55 EPS easily beat the $1.52 forecast. So, while earnings were down, they weren’t down as far as feared. Even better, the 2% positive surprise was a welcome reversal from the previous quarter’s 9% EPS miss.

The dividend, however, makes this a stock worth paying attention to. Kohl’s is the second-highest yielding stock in Goldman’s dividend growth basket, at 5.82%, and pays out $2.68 per share annually. Again, the story is slightly clouded; while Kohl’s pays out generously, it does not do so consistently, having made just 10 payouts since 2012. Again to the positive side, Kohl’s has been careful to continuously adjust the rate for an increasing payment.

KSS is an inconsistent stock, but its earnings are moving in the right direction and the company is confident enough now to restart dividend payments at nearly 6%. In a climate of falling interest rates and bond yields, and an economy that runs on consumer spending, this alone recommends KSS for return-minded investors.

Randal Konik , writing from Jefferies, agrees that KSS is worth buying. He cites the company’s strong name recognition, and notes that shares are trading at a discount; the PE ratio is 8.01 now, and only expected to reach 8.65 by 2022. With the low valuation and the current high dividend, Konik sees KSS as a stock with a positive risk/reward balance. He gives it a price target of $75, suggesting an upside potential of 62%.

Kohl’s has a Moderate Buy rating from the analyst consensus, with an even split of 5 buys and 5 holds, along with 2 sells. Shares are attractively priced at $46, and the $56 average price target gives the stock a 21% upside.