Goldman sees underperforming dividend stocks catching up and recommends using options to play it

Published Wed, May 24 20231:00 PM EDTUpdated Wed, May 24 20232:13 PM EDT

Jesse Pound @/in/jesse-pound @jesserpound

Dividend stocks have been lagging the broader market in 2023 and it could be time for that gap to close, according to Goldman Sachs. In a note to clients Wednesday, Goldman's derivatives research team highlighted the underperformance of the iShares Select Dividend ETF (DVY) to show how dividend payers are struggling. "Our proprietary macro model indicates DVY has significantly underperformed its normal relationship with macro assets by -33% since 2018 and by -16% since the start of the year despite only slight ETF outflows," the note said. "While the DVY has 50%+ exposure to Utilities (-6% YTD) and Financials (-5% YTD), it does not fully explain the weakness of high dividend stocks." DVY YTD mountain Dividend stocks have underperformed in 2023. There are several major stocks within DVY that don't fall under utilities or financials but are still underperforming despite dividends that appear well-supported. Goldman listed Verizon , IBM and Pfizer as candidates for a potential options trade. All three stocks have retreated in 2023, with Pfizer falling more than 20%. "While taking no view on the direction of the market we see potential for a catch-up trades in DVY stocks that underperformed year-to-date, especially where last 12-month dividend yield is above next 12-month free cash flow yield (provides a safety net to dividends), and see value in buying calls on these names," the note said. Comparing the dividend yield to free cash flow is one way to weed out companies that could soon cut their payout, which would likely cause the stock to fall. A call is an option contract that gives the holder the right to a buy a stock at a preset exercise price by the contract's expiration date. The trade serves as a bet the stock will rise above the exercise price, allowing the call holder to buy the stock at a discount to the market. Call options have an upfront cost, but if the stock falls instead, then the trader can just let the contract expire for no additional loss. — CNBC's Michael Bloom contributed reporting.