Goldman's 10 Stocks for Dividend Growth

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Includes: ADI, BAX, BMY, CTL, DIA, HAS, HD, KLAC, LLTC, MMM, QQQ, SPY, T
by: David Hunkar

According to a research note by Goldman Sachs, the S&P 500 gained 255% in price appreciation in the last 20 years. When dividend reinvestment is considered, the S&P 500’s total return jumps to 439.3%. That amounts to a difference of an astonishing 184.3% in returns.

Goldman noted:

“Amid the slowing economic environment and historically high cash balances in corporate America … we believe that investors should continue to invest in companies whose dividend payouts will drive shareholder returns.”

Hence Goldman Sachs searched for companies matching the following conditions:

  • “Dividend yield (based on current stock price and projected 2011 dividend) must be greater than 10-year Treasury yield of 2.77%;
  • Company must not have cut its dividend in 2010;
  • Goldman analysts must expect company to increase dividend in 2011;
  • Because strong cash flow is necessary to sustain and increase dividends, free cash flow yield must be greater than 5%;
  • Net debt-to-equity ratio must be less than 1;
  • Goldman must have a “buy” rating on the stock.”

The search returned the stocks noted below:

Company Ticker Price as of Sep 16, 2010 Dividend Yield% - Est 2011 Dividend Growth% - Est 2011 FCF Yield% - Est. 2011
CenturyLink Inc. CTL $38.08 7.8 3 13.5
AT&T Inc. T $28.11 6.4 7 7.3
Bristol-Myers Squibb Company BMY $26.95 4.8 2 9.8
The Home Depot, Inc. HD $29.95 3.4 5.9 8.5
KLA-Tencor KLAC $31.08 3.2 25 9.7
Linear Technology Corp. LLTC $31.64 3.2 6.4 6.9
Analog Devices, Inc. ADI $29.48 3 4.8 9.8
3M Company MMM $84.95 2.8 14.3 6.3
Hasbro, Inc. HAS $44.43 2.8 25 8.6
Click to enlarge

Note: FCF = Free Cash Flow

Source: The Globe and Mail

In addition to the above nine equities, medical equipment maker Baxter International (NYSE:BAX) also made it to the list. But the dividend data is not included in the list. Analog Devices, KLA-Tencor and Linear Technology are semiconductor firms that used to be high-fliers during the dot com mania.

Disclosure: None