Goldman Sachs Group, Inc. (NYSE:GS) is a key player in the banking industry to watch, not only from an investment standpoint, but from a researcher’s perspective as well. We’ll explain.
As companies are recovering from the recent financial crisis, they’ve found themselves with large amounts of cash on their balance sheets. In order to do something with this cash, companies can invest it in order to grow, to pay down their debts, to buy back shares or to initiate and increase dividends. This last point is important, since shareholders who invest in companies that pay dividends receive something more than income from quarterly cash payments. Dividends have accounted for more than 40% of the returns of the S&P 500 since 1926, and Goldman Sachs Group, Inc. (NYSE:GS) revealed in a paper recently, the long-term results of dividend-oriented investing.
Stockholders of dividend-paying companies enjoy benefits of receiving cash payments in addition to owning higher-quality long-run investments. At the same time, on a total return basis, dividend-paying stocks have outperformed non-dividend paying peers, and one of the reasons for this phenomenon is simple. Put simply, dividends increase a stock’s yield, but they are also viewed as more attractive to income-focused investors, which is important to note.
In its paper, Goldman Sachs Group, Inc. (NYSE:GS) said, “as a result, we believe investors want to own these successful, shareholder-oriented companies, thereby contributing to the share price appreciation over time,” shedding light on the fact that the capability of businesses to generate strong free cash flow is crucial as well. Obviously, a solid management team that is disciplined in its use of cash ties this picture together, and they must have an appreciation for the shareholder.
The Goldman Sachs Group, Inc. (NYSE:GS) report aside, it is an interesting time for dividend-seeking investors. Low payout ratios, together with high corporate cash balances and attractive incomes in comparison with bonds, make a compelling case. Low payout ratios, while corporate cash levels and profits are high suggest that there is room for increasing dividends.
Dividend growers have historically enjoyed a strong track record as interest rates rise, and the increase of the interest rates is often a result of inflation. Another point in favor of dividends is that stock dividends may provide similar investment income to other sources of income like US Treasury bonds, for example.
Thus, stocks with growing dividends have some important benefits, including the opportunity to invest in high quality companies, which can grow their free cash flow, and incomes that can be paid in the form of quarterly cash payments.
Goldman Sachs Group, Inc. (NYSE:GS) also included a list of S&P 500 sector earnings by current dividend yield. The key thing to watch here is the “Current Minus Mean (%)” category, which we’ve ranked the sectors from smallest to largest. Let’s take a closer look.
