Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. 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 that coveted distribution of a company's earnings paid out to shareholders, and investors often view it by its dividend yield, a metric that measures the 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 14.23%. The financial services firm is currently shelling out a dividend of $0.9 per share, with a dividend yield of 2.59%. This compares to the Financial - Investment Management industry's yield of 1.62% and the S&P 500's yield of 1.61%.
Taking a look at the company's dividend growth, its current annualized dividend of $3.60 is up 18.4% from last year. Over the last 5 years, T. Rowe Price has increased its dividend 5 times on a year-over-year basis for an average annual increase of 12.59%. 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. T. Rowe's current payout ratio is 43%, meaning it paid out 43% 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 $8.58 per share, which represents a year-over-year growth rate of 6.32%.
Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. But, not every company offers a quarterly payout.
Big, established firms that have more secure profits are often seen as the best dividend options, but it's fairly uncommon to see high-growth businesses or tech start-ups offer their stockholders a dividend. 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 TROW is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).