High dividend-paying stocks are down 7% this year versus gains of 9% and 26% for the S&P 500 and Nasdaq, respectively. Now, it is time for investors to prepare for them to rebound, according to Goldman Sachs options strategists.
The firm's models show that ETF iShares Select Dividend ETF (NASDAQ: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. While the ETF has high exposure to underperforming sectors utilities and financials, this does not fully explain the weakness, according to the strategists.
"From an options market perspective, option prices are below median levels and skew is in bearish territory relative to the past year for the average DVY stock," they commented. "While taking no view on the direction of the market, we see potential for catch-up trades in DVY stocks where free cash flow yield is above dividend yield and see value in buying calls on these names."
The firm highlighted 10 high-dividend call-buying ideas that have underperformed year-to-date where the dividend yield is less than the free cash flow yield:
- Verizon (NYSE:VZ) | LTM Dividend Yield 7.3% | NTM FCF Yield 11%
- AT&T (NYSE:T) | LTM Dividend Yield 6.8% | NTM FCF Yield 14.4%
- Philip Morris Intl (NYSE:PM) | LTM Dividend Yield 5.5% | NTM FCF Yield 6.5%
- IBM (NYSE:IBM) | LTM Dividend Yield 5.2% | NTM FCF Yield 8.9%
- Pfizer (NYSE:PFE) | LTM Dividend Yield 4.2% | NTM FCF Yield 7%
- Gilead (NASDAQ:GILD) | LTM Dividend Yield 3.8% | NTM FCF Yield 9.1%
- Chevron (NYSE:CVX) | LTM Dividend Yield 4% | NTM FCF Yield 8.8%
- Valero Energy (NYSE:VLO) | LTM Dividend Yield 3.6% | NTM FCF Yield 23.3%
- Coca-Cola (NYSE:KO) | LTM Dividend Yield 3% | NTM FCF Yield 3.6%
- Lockheed Martin (NYSE:LMT) | LTM Dividend Yield 2.6% | NTM FCF Yield 5.5%