Goldman Sachs: It’s time to chase dividends – 50 + 50 shares from Europe for high returns

Of Eleftheria Kourtali

European stocks with a generous dividend policy are expected to be the most valuable safe haven for investors during this period as, as Goldman Sachs points out, in an environment of high macroeconomic volatility and high inflation, high dividend yields outperform. In this context, the American bank identifies 100 shares from the European market that can be a “magnet” for investors who want to have an exposure to dividends.

More specifically, as Goldman Sachs points out in today’s report, yield hunting has been a major issue in the last business cycle, with bond yields falling after the global financial crisis, culminating in the last two years with more a quarter of global debt to have a negative return. Now, on an annual basis, government bond yields have risen sharply, but real yields remain deeply negative.

Surprisingly, the bank notes, this hunt for yields did not help high-yield stocks, that is, those that offered high dividends. Goldman Sachs estimates that now There are many good reasons for investors to look at this class of stock again. The following:

– In Europe, the yield gap between stocks and bonds remains particularly large. Even after the bonds sell out in early 2022, the opportunity to generate returns remains relatively low on fixed income securities. The yields on government and corporate bonds, despite their rise, are not far from the historical low, however the return on shares is at the same levels as the historical average.

As inflation remains high, investors may begin to prefer “real” cash flows in the short term to uncertain capital gains.

– In an environment of high macroeconomic instability, investors will have to refocus on fixed income strategies, as income will become a major performance lever. Over the past 20 years, dividends and reinvested dividends have contributed to 73% of investor returns in the UK, 64% in Europe and 39% in the US. This could increase with inflation as the contribution of dividends to total return tends to be higher in times of high inflation.

– Structural demand for income remains strong given the low real returns, the aging population and possible increases in capital gains tax.

– Finally, higher yields usually also indicate lower sensitivity to interest rate changes. European stocks in general and high dividend yields in particular, have a high yield and a negative beta compared to the 10-year US. In other words, they provide a significant income stream and outperform when bond yields increase. Goldman Sachs expects high dividend yields to continue to outperform in this high inflation environment.

Goldman stock analysts predict that dividends on the pan-European STOXX 600 index will rise by 10% this year, with energy and banks being the most generous industries.

In this context, Goldman Sachs presents the two stock baskets that are its options in terms of dividend policy.

In a basket, the High Dividend Yield basket, has placed the 50 stocks that have the highest and sustainably high dividend yield. The average 12-month dividend yield of these shares is at 5%, compared to 3% which is the average dividend yield for the STOXX 600 index.

In the second basket of shares, the Dividend Growth basket, 50 companies with strong dividend growth and high dividend yields are identified. On average each company in this basket is expected to increase dividends by about 30% between 2022-2024 (compared to about 15% on average for STOXX 600 companies) and has a dividend yield of 2.4%.