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Kostin: Dividend and buyback stocks will outperform in 2016

Kostin's companies with winning strategy

Companies with high cash-return strategies will outperform in 2016, and that should come as no surprise, Goldman Sachs' David Kostin said Tuesday.

"Historically speaking, it's been a great strategy for the last 20 years. Seventy percent of the time in the last 20 years, the market has rewarded those companies that have returned cash — dividends and buybacks — as compared with those companies that are investing in [capital expenditures] or pursuing M&A," Goldman's chief U.S. equity strategist told CNBC's "Squawk on the Street."

With the market trading at roughly 17 times forward earnings, stocks are looking expensive, Kostin added. The likelihood that the Federal Reserve will gradually raise interest rates next year creates a challenging environment for equities, and it is likely the market's price-to-earnings multiple will fall, he said.

At the outer end of the distribution, investors can find companies returning a 10 percent cash yield through dividends and buybacks, compared with a 5 percent cash return in the broader market.

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"Collectively you're getting twice the cash return to an investor in an environment where you're not getting a PE multiple and, frankly, you're not getting really strong earnings growth, and in that environment, that's what you want to be focusing on," he said.

Asked about the recent fall in classic dividend players — utilities, telecoms and consumer staples — Kostin said, "A combination of returning cash via buybacks and dividends is generally a more attractive strategy than purely a dividend yield strategy."

Kostin also said investors are better positioned in the shares of companies with high tax rates than those with low rates.

"It's somewhat counterintuitive, but the risk is always that the low tax rate companies are going to be subject to a rise in the tax rate, whereas, if you're starting out with a high tax rate, that is beneficial," he said.