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The return of the digital dividend check

S&P 500 dividends will grow by 4.5% per year on average for the next decade, Goldman Sachs Chief U.S. Equity Strategist David Kostin forecasts in a new note. Yahoo Finance’s Brian Sozzi shares the details.

Video transcript

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JULIE HYMAN: Get excited investors, because apparently, according to Brian Sozzi's take today, dividends, they're coming. Would-- tell us where they're coming, how big are they? What's going on?

BRIAN SOZZI: Yeah, I realize it's more exciting to go out there and try to hit a home run, and get 100% gain on a meme stock, like an AMC or GameStop, but let's remember dividends. Like Myles noted before, they are, in fact, the old friend of investors. And I'm back on the Goldman Sachs/David Kostin beat this morning.

In a new note, he is saying-- or he's looking for dividends to grow by 4 and 1/2 percent over the next decade. That is pretty good, and in part, fueled by companies rebuilding their cash positions over the pandemic. This year, Kostin sees dividends growing by 6% and another 6% in 2022. Kostin noting this, interesting quote, "at the company level, dividend actions year-to-date support our view that the post-pandemic year will see substantial dividend growth."

Not measly dividend growth. Looking at pretty substantial increase, as Apple kicked this off, let's recall, in April with a 7% dividend increase of its own. Some of the biggest dividend hikes, sectors folks should be looking for, health care, information technology, consumer discretionary, and the financial sectors.

These four sectors made up 52% of dividends in 2020. That number, at least according to Kostin, is supposed to go up to 71% of S&P 500 dividend growth through 2022. So, those are the sectors to indeed watch. And what's interesting here, guys, at least to me as someone who cares about fundamental analysis, investors are starting to position ahead of these dividend increases coming this year into 2022.

Two ways I found out, or I looked into this potentially starting to happen, look at the spider portfolio S&P 500 High Dividend ETF. That is up 21.7% year-to-date. And then I also looked at the Schwab US Dividend Equity ETF, that is up 16.2% year-to-date, according to Yahoo Finance Plus data, of course. Both of those ETFs are outperforming the S&P 500.

So, tying this all together, here's my hot take for today, folks. Stop what you're doing today and screen for companies with high cash positions, growing earnings, and low debt to equity ratios. Your digital bank account, yes, yours, will thank you very soon for your efforts. And a good name here that fits some of these qualifications is out today.

Darden, Olive Garden owner, raised its dividend by 25%. That is a major increase. And they're doing it against the backdrop of a Longhorn Steakhouse notching the same store sales, up about 15% in May. Everybody needs a good 50-ounce steak.

And on their balance sheet, they have a $1.2 billion in cash, and about $950 million in debt. So, it doesn't make-- it actually makes a lot of sense to me that they are raising the dividend by 25%. Maybe next quarter, it's 30%.

MYLES UDLAND: I guess the question, Sozzi, is if you were in dividend paying names, do you want to reinvest the dividend to acquire more shares, or do you want to actually keep the cash?

BRIAN SOZZI: That is a very good question. If you are a believer in the bull market, Myles, and if, in fact, you think inflation is transitory and the Fed will be friendly on rates and bond purchases, maybe you want to go out there and gobble up some stock. But if you're nearing retirement, perhaps you just want to keep that cash and gift it to your kids.

JULIE HYMAN: Yeah, I would be really curious to see of holders of that ETF, or holders of these high dividend payers, what the age breakdown is. I'm always fascinated by that, because is it indeed people who are looking for that sort of fixed income, if you will, feature of those dividend payers, but I don't know if that data exists.