Stocks Paying Big Dividends Should Outperform This Year

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Stocks prioritizing dividends should outperform those emphasizing stock buybacks, says

Goldman Sachs
.

S&P 500 dividends should grow by about 5% this year versus 2022 levels, even amid stress in the banking sector and slowing economic growth. But stock buybacks will fall about 10%.

So concludes an April 14 note by Goldman Sachs Portfolio Strategy Research. As a result of that, the “cash spending outlook supports stocks paying dividends over those focusing on repurchasing shares,” according to the note.

In this year’s first quarter, dividends paid by companies in the

S&P 500
grew by 8% year over year. But buybacks slid by 11% in last year’s third quarter and by 21% in the fourth quarter. The firm expects a further slowdown in this year’s first quarter.

The report cites several impediments for share repurchase growth, including weak cash flow growth and falling cash balances. “Elevated recession risk also incentivizes both companies and investors to focus on balance sheet strength,” the note observes.

It points out that companies directing cash for buybacks have outperformed those with large share repurchases.

For example, since March 8, when the turmoil in the regional banking sector unfolded with news about Silicon Valley Bank being in trouble, the S&P 500 has gained 4%, largely on the backs of tech companies that pay less in dividends.

The S&P 500 Dividend Aristocrats Index is up 2%. Those 67 companies, including

3M

(ticker: MMM),

Johnson & Johnson

(JNJ), and

Procter & Gamble

(PG), have paid out a higher dividend for at least 25 straight years.

Meanwhile, the basket including 50 stocks with the highest trailing 12-month trailing repurchases as a share of market capitalization has traded sideways.

This could have consequences for investors.

“The difference in outlooks for dividend and buyback growth suggests firms focusing on dividends will continue to outperform buyback stocks,” according to the Goldman analysts.

Among the stocks Goldman Sachs has in its dividend growth basket are

Home Depot

(HD), which yields 2.9%;

Ford Motor

(F), which yields 4.8%;

Molson Coors Beverage

(TAP), which yields 2.9%;

Wells Fargo

(WFC), which yields 2.9%, and

Pfizer

(PFE), which yields 4%.

The report expects S&P 500 dividends to grow by another 4% in 2024.

Write to Lawrence C. Strauss at [email protected]