Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. But when you're an income investor, your primary focus is generating consistent cash flow from each of your liquid investments.
Cash flow can come from bond interest, interest from other types of investments, and of course, dividends. A dividend is the distribution of a company's earnings paid out to shareholders; it's often viewed by its dividend yield, a metric that measures a dividend as a percent of the current stock price. Many academic studies show that dividends account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.
T. Rowe Price in Focus
Based in Baltimore, T. Rowe Price (TROW - Free Report) is in the Finance sector, and so far this year, shares have seen a price change of 10.37%. The financial services firm is currently shelling out a dividend of $0.9 per share, with a dividend yield of 2.68%. This compares to the Financial - Investment Management industry's yield of 2.38% and the S&P 500's yield of 1.83%.
In terms of dividend growth, the company's current annualized dividend of $3.60 is up 18.4% from last year. T. Rowe Price has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 12.59%. Looking ahead, future dividend growth will be dependent on earnings growth and payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Right now, T. Rowe's payout ratio is 45%, which means it paid out 45% of its trailing 12-month EPS as dividend.
TROW is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2020 is $8.18 per share, with earnings expected to increase 1.36% from the year ago period.
From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. But, not every company offers a quarterly payout.
For instance, it's a rare occurrence when a tech start-up or big growth business offers their shareholders a dividend. It's more common to see larger companies with more established profits give out dividends. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. That said, they can take comfort from the fact that TROW is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #1 (Strong Buy).