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Goldman Sachs: 3 High-Yield Dividend Stocks With Growth on the Horizon

Investors have voted with their wallets, and the verdict is in: they want income and growth. That shouldn’t be surprising, as income and growth are the keys to profitable investing, but market conditions have been volatile in the last 12 months. With share appreciation unreliable, investors have turned to dividends.

Dividends offer the steady income stream that investors want, while the top dividend stocks are available at a relative discount to market prices. According to Cole Hunter, a top strategist with Goldman Sachs, “The Dividend Growth basket … now trades at nearly the largest discount to the median S&P 500 stock since 2006.” He has assembled a list of stocks which he expects to both beat the S&P’s average dividend yield by a wide margin, and extend that margin through sustained dividend growth in the coming three years.

We’ve used TipRanks’ Stock Screener tool to further sort Hunter’s list of dividend champs, and find three with Buy ratings and great prospects for mid-term growth.

Citizens Financial (CFG)

The banking industry has had its ups and downs in recent years. It never really recovered the reputation lost in the 2008 Great Recession, even though most big banks had, by the end of 2009, paid the government back for money received under the Troubled Asset Relief Program. The long years of low-interest rates from 2009 through 2015, under the Federal Reserve’s quantitative easing policy, bit into lending profits but that pressure eased with the return of rate increases in December 2015. The rate cuts earlier this summer bode ill for the banking industry’s loan segments.

At the same time, however, earnings are up and expected to continue gaining. Citizens Financial, a long-standing name in the US banking industry, exemplifies the conflicting trends the industry faces, and the strength it has to weather the possible storms. With a $15 billion markets cap and more than 1,100 branches in 11 states, CFG ranks 13th in size among American banks. Its $6.13 billion in 2018 revenues led to a net income that year of $1.72 billion and the company’s quarterly earnings have been steady increasing through 2019.

Better yet, for income investors, CFG offers an annualized dividend yield of 4.05%, more than double the S&P average of 2.01%. The payment, $1.44 per share, is made in quarterly installments of 36 cents. According to Goldman Sachs’ Hunter, CFG’s yield is likely to reach 4.6% by the end of 2020, and through the combination of appreciation and dividends, investors will see an estimated return of 5.1% by 2021.

CFG’s firm position in its industry underlies the stock’s generally favorable reviews from Wall Street analysts. The stock received two Buy ratings last week, from RBC Capital and Evercore ISI.

Writing from RBC, 5-star analyst Gerard Cassidy reiterated his Buy on the stock, and set a $40 price target. As his bottom line, Cassidy said, “Earnings were essentially in line with expectations, reflecting strong fee income, which was led by mortgage banking, slightly lower credit costs and operating expenses. Though the company's fee revenue was strong in the quarter, net interest income was adversely impacted by a lower NIM… with its 10.3% CET1 ratio, [CFG] is well capitalized.” Cassidy’s target suggests a 12% upside to this stock. (To watch Cassidy's track record, click here)

Evercore’s John Pancari sees a similar path forward for CFG, saying, “CFG’s evolving business model is benefiting from momentum in fee businesses and a greater overall fee contribution – helping temper the impact of lower rates. CFG remains prudent in actively returning capital. Accordingly, we expect this positioning to continue to present upside to the stock’s discount valuation over time.”

Overall, CFG holds a Moderate Buy from the analyst consensus, with recent reviews including 2 buys, 1 hold, and 1 sell. Shares are trading at $35.58, so the average price target of $41 gives CFG an upside potential of 15%. (See Citizens Financial stock analysis on TipRanks)

AbbVie (ABBV)

This large-cap pharmaceutical giant has been pursuing a successful two-path growth strategy, making acquisitions for expansion and reaping profits from new medications (SKYRIZI) and established drugs (Humira). The AbbVie faced risk on the Humira front, however, as the patent on the popular biologic anti-inflammatory drug has expired and competition is growing. A risk management strategy is essential here, as Humira accounts for approximately 50% of the company’s drug division revenue.

Revenue remains strong. For fiscal 2018, AbbVie reported a $32.75 billion revenue stream, from which it derived a $6.38 billion income. Earnings per share have been increasing steadily since Q4 2018, and have beaten the forecasts in 1H19. The Q3 forecast is for $2.29 per share.

All of this gives AbbVie, like CFG, a solid foundation for profits, investor rewards, and growth. The company has been raising the dividend payment steadily for the last six years, showing confidence in itself and a commitment to returning income to investors. The current payment, of $1.07, annualizes to $4.28 and represents an impressive yield of 5.54%; in fact, AbbVie has the highest yield of the stocks in this article. According to Cole Hunter’s estimates, ABBV’s yield will increase to 6.1% next year, and by 2021 the return on cash invested should reach 6.6%.

Cowen analyst Steve Scala likes this stock, basing his assessment and Buy rating on a meeting with company management. He came away from that meeting with confidence in management’s plans for business and acquisition goals, in its new product portfolio, and its strategies to manage risk to the Humira profits. Scala’s $90 price target shows that confidence, as it indicates a 16% upside to the stock. (To watch Scala's track record, click here)

Writing from Piper Jaffray, 5-star analyst Christopher Raymond was impressed by the company’s new drugs, especially Skyrizi and Rinvoq. He says, “Just putting pen to paper, 5% RA market share in our model equates to annual US revenue of ~$1.3B -- a run rate… that far exceeds our FY20 estimate of $400M.”

All in all, Wall Street loves AbbVie. TipRanks tracking of 5 analyst ratings on the company shows a consensus Strong Buy, with 4 analysts recommending Buy and only one recommending Hold. The average price target is $86.33, representing a 10% upside from current levels. (See AbbVie stock analysis on TipRanks)

Valero Energy (VLO)

With our third stock, we move over to the energy industry. This cash-rich sector faced headwinds in the form of high overhead, heavy government regulation, and a lingering worry that Congress will shift farther left, pushing anti-fossil fuel policies, or that a Democratic White House victory next year will usher in an anti-oil stance. For now, however, mid- and downstream player Valero holds a stable position in the markets.

The company operates refineries, pipelines, and retail outlets for the manufacture and distribution of gasoline, diesel fuel, other petroleum distillates and fuels, and energy. Valero doesn’t extract the fossil fuels. Rather, it processes the raw products into usable forms, transports the refined products to market, and sells them. Owning the means to do this, along with the final sellable product, Valero maintains control over its business model.

Valero is one of the largest retail companies in the US, with 15 refining plants and over 6,800 outlets in the US, Canada, Caribbean, and UK. The company saw $117 billion in total revenues in the last fiscal year, which brought in $4.57 billion in net income. The large discrepancy underlines the high overhead common in the energy industry, while the high net income shows that energy remains profitable.

Returning profits to investors has long been a priority for Valero. The company currently shows a dividend yield of 3.86%, translating to a $3.60 annualized payout. The quarterly payment comes to 90 cents per share, and the company has been raising it steadily for the last five years. In 2014, the quarterly dividend was just 27.5 cents. Goldman’s Hunter sees investors benefiting from a higher 4.5% yield next year, while the overall return should reach 4.9% in 2021.

Writing from Wells Fargo, analyst Roger Read said back in August, “Valero is well-positioned to participate in increasing discounted domestic crude volumes along the Gulf Coast, especially as IMO 2020 is implemented.  In 2018 and 2019, Valero's expected operating performance and commitment to shareholder returns via dividends and share repurchases appears to be favorably affecting its valuation multiples.” (To watch Read's track record, click here)

Since writing those lines, Read has reiterated his thesis on Valero, and boosted his price target. His new target, $108, implies an upside of 15% to the stock.

It’s not often that the analysts all agree on a stock, so when it does happen, take note. VLO’s Strong Buy consensus rating is based on a unanimous 7 Buys. The stock’s $99 average price target suggests a modest upside of 5% and a change from the current share price of $94. (See Valero Energy stock analysis on TipRanks)