A small number of stocks are projected to deliver an outsized proportion of the aggregate growth in dividends per share (DPS) for the S&P 500 Index (SPX) in 2020, which should bolster their prices in a market that is likely to be volatile, Goldman Sachs reports. “Consensus expects sectors with the largest contribution to S&P 500 dividends per share to deliver the fastest dividend growth during 2020,” Goldman says in a recent U.S. Equity Views report.


“At the stock level, the top 20 dividend payers are expected to account for 36% of 2020 S&P 500 DPS (dividend per share),” Goldman adds. Among those 20 stocks are these 8, with their projected 2020 DPS increases: Microsoft Corp. (MSFT), 8%, Exxon Mobil Corp. (XOM), 6%, JPMorgan Chase & Co. (JPM), 11%, Johnson & Johnson (JNJ), 5%, Cisco Systems Inc. (CSCO), 6%, AbbVie Inc. (ABBV), 6%, Intel Corp. (INTC), 4%, and Bank of America Corp. (BAC), 20%.


Significance for Investors

The trailing 12-month dividend yield is now approximately 2.0%, exceeding the yield on the 10-Year U.S. Treasury Note for the first time since Oct. 2016, Goldman observes. “Info Tech, Financials and Health Care collectively account for 45% of S&P 500 dividends and will each grow DPS by close to 10% in 2020,” the report states. “At the other extreme, the high yielding Real Estate and Utilities sectors are forecast to be among the slowest DPS growth sectors next year,” at 3% and 4%, respectively, Goldman adds.


For the S&P 500 as a whole, Goldman projects DPS to grow by 7% in 2019 and by 6% in 2020. They calculate that the payout ratio will rise by 2 percentage points in 2019, to 35%, as a result of 7% DPS growth exceeding 3% EPS growth. Nonetheless, the payout ratio still would be below its 30-year average of 37%. In 2020, they forecast that EPS will increase by 6% as the result of “a modest rebound in US and global economic growth and an abatement of idiosyncratic headwinds.”


In 2020, Goldman estimates that the dividend yield on the S&P 500 will rise to 2.2%, with the top 20 dividend payers offering a blended 3.2%, on a capitalization-weighted basis. While Microsoft is projected to have the lowest dividend yield of the 20 stocks on Goldman’s list in 2020, at 1.5%, it will become the largest contributor to overall S&P 500 DPS, with a 3.0% weight, by virtue of its massive market cap.


The projected 2020 yields on the other stocks listed above are: Exxon Mobil, 5.2%, JPMorgan Chase, 3.4%, Johnson & Johnson, 3.0%, Cisco, 2.9%, AbbVie, 7.0%, Intel, 2.8%, and Bank of America, 2.8%.


From 1960 through 2018, reinvested dividends plus the power of compounding were responsible for 82% of the total return delivered by the S&P 500 during that time period, according to a white paper by Hartford Funds based on data from Morningstar Inc. The same paper also cited a study Wellington Management that looked at the performance of S&P 500 stocks from 1930 through 2018.


Wellington divided the data into 9 decades and stocks into 5 quintiles based on their dividend yields. The number of decades in which stocks in each quintile beat the full index were: top quintile, 6 times (66.7%), second quintile, 8 times (77.8%), third quintile, 5 times (55.6%), fourth quintile, 3 times (33.3%), bottom quintile, 4 times (44.4%).


Part of the reason why the top quintile was not the leader in beating the market over the long term, Wellington explains, is that these stocks can have high payout ratios that are not sustainable if earnings drop significantly, and stocks that are forced to cut dividends often see a drop in price. Also, stocks with high payouts may not be investing enough for future growth in their businesses.


Looking Ahead

Goldman forecasts that S&P 500 DPS will grow at an average annual rate of 3.5% through 2028. They note that the dividend swap market is pricing in a mere 0.7% average annual rate of increase over the same 10-year period, which they see as overly pessimistic. If Goldman is correct, the broader market, in addition to the stocks mentioned above. may receive a boost.


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