What are we looking for?
Dividends account for a big chunk of stock market returns. Over the past 20 years, the S&P 500 gained 255 per cent in simple price appreciation, according to Goldman Sachs. Including reinvested dividends, the S&P 500's total return rises to 439.3 per cent - a difference of 184.3 percentage points.
Today we're looking for U.S. stocks with above-average yields, strong balance sheets and the potential for dividend growth, as selected by Goldman Sachs.
"Amid the slowing economic environment and historically high cash balances in corporate America … we believe that investors should continue to invest in companies whose dividend payouts will drive shareholder returns," Goldman said.
The Screen
Goldman looked for companies based on the following criteria:
- Dividend yield (based on current stock price and projected 2011 dividend) must be greater than 10-year Treasury yield of 2.77 per cent;
- Company must not have cut its dividend in 2010;
- Goldman analysts must expect company to increase dividend in 2011;
- Because strong cash flow is necessary to sustain and increase dividends, free cash flow yield must be greater than 5 per cent;
- Net debt-to-equity ratio must be less than 1;
- Goldman must have a "buy" rating on the stock.
The results
"With rates remaining low and the Fed staying accommodative, the opportunity to benefit from increased income remains at the forefront of our recommendation set," Goldman said. "We like our money upfront (dividends)."
The 10 companies that made the cut have dividend yields, based on the current stock price and projected 2011 dividend, ranging from a low of 2.8 per cent (Baxter International Inc., Hasbro Inc. and 3M Co.) to a high of 7.8 per cent (CenturyLink Inc.). Remember to do your own due diligence before investing in any security.
John Heinzl