Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. But for income investors, generating consistent cash flow from each of your liquid investments is your primary focus.
While cash flow can come from bond interest or interest from other types of investments, income investors hone in on 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.
Procter & Gamble in Focus
Headquartered in Cincinnati, Procter & Gamble (PG - Free Report) is a Consumer Staples stock that has seen a price change of 5.22% so far this year. Currently paying a dividend of $0.79 per share, the company has a dividend yield of 2.41%. In comparison, the Soap and Cleaning Materials industry's yield is 2.11%, while the S&P 500's yield is 1.83%.
In terms of dividend growth, the company's current annualized dividend of $3.16 is up 4.4% from last year. In the past five-year period, Procter & Gamble has increased its dividend 5 times on a year-over-year basis for an average annual increase of 3.41%. Any future dividend growth will depend on both earnings growth and the company's payout ratio; a payout ratio is the proportion of a firm's annual earnings per share that it pays out as a dividend. P&G's current payout ratio is 59%, meaning it paid out 59% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for PG for this fiscal year. The Zacks Consensus Estimate for 2020 is $5.25 per share, which represents a year-over-year growth rate of 2.54%.
Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. It's important to keep in mind that not all companies provide a quarterly payout.
High-growth firms or tech start-ups, for example, rarely provide their shareholders a dividend, while larger, more established companies that have more secure profits are often seen as the best dividend options. Income investors must be conscious of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. That said, they can take comfort from the fact that PG is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #2 (Buy).