Goldman says dividend stocks are rarely this cheap, likes Morgan Stanley and Best Buy

Published Mon, Nov 4 20198:48 AM ESTUpdated Mon, Nov 4 201910:12 AM EST

Stocks that pay big dividends haven't been this cheap in at least 40 years, according to Goldman Sachs. The valuation gap between high- and low-dividend-yield stocks is close to the widest it has been since around 1980, the bank said. The market is pricing in "an overly pessimistic" level of dividend payouts with the swap-market prices implying a 2.7% growth in S & P 500 dividend per share through 2023, well below Goldman's estimate for 5% annual growth over the next five years. "Dividend growth pessimism is evident in the valuation of high dividend yield stocks," Goldman chief U.S. equity strategist David Kostin said in a note Friday. "Other metrics, such as EV/Sales and Price/Book, also show high dividend yield stocks trade at an unusually large valuation discount relative to stocks with low dividend yields." As companies continue to reduce the amount of share buybacks amid increased political scrutiny, they will more likely to resort to paying dividends to reward shareholders, Kostin noted. "High policy uncertainty, reduced cash balances, increased leverage, and elevated buyback payout ratios have likely contributed to the reduction in repurchases," Kostin said. "A potential decline in share repurchases represents an upside risk to our DPS forecasts." S & P 500 buybacks plunged by 18% year over year during the second quarter and are on track to decline another 4% in the third quarter, Goldman said. The bank forecast buybacks to decline by 15% during full-year 2019 to $710 billion. Goldman screened stocks with strong dividend growth and high dividend yields, based on their dividend estimates and payout ratios. The average stock in its basket has a dividend yield of 3.5% versus 2% for the typical S & P 500 stock. The 50-stock basket has outperformed the S & P 500 by 5 percentage points during the last two months, returning 11%. Some of the stocks with the fastest dividend growth through 2021 include Morgan Stanley , Hewlett Packard Enterprise , Broadcom , Best Buy and Delta Air Lines .

A salesman carries a Best Buy shopping basket in San Francisco, California.

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Stocks that pay big dividends haven't been this cheap in at least 40 years, according to Goldman Sachs.

The valuation gap bet