All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. However, when you're an income investor, your primary focus is generating consistent cash flow from each of your liquid investments.
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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.
Merck in Focus
Merck (MRK - Free Report) is headquartered in Kenilworth, and is in the Medical sector. The stock has seen a price change of -6.25% since the start of the year. Currently paying a dividend of $0.61 per share, the company has a dividend yield of 2.86%. In comparison, the Large Cap Pharmaceuticals industry's yield is 2.33%, while the S&P 500's yield is 1.65%.
In terms of dividend growth, the company's current annualized dividend of $2.44 is up 8% from last year. Merck has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 6.77%. 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. Merck's current payout ratio is 44%. This means it paid out 44% of its trailing 12-month EPS as dividend.
MRK is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2020 is $5.70 per share, which represents a year-over-year growth rate of 9.83%.
Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. However, not all companies offer 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. Income investors have to be mindful 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 MRK is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).