Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. However, 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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.
Colgate-Palmolive in Focus
Based in New York, Colgate-Palmolive (CL - Free Report) is in the Consumer Staples sector, and so far this year, shares have seen a price change of 12.83%. The consumer products maker is currently shelling out a dividend of $0.44 per share, with a dividend yield of 2.27%. This compares to the Soap and Cleaning Materials industry's yield of 1.89% and the S&P 500's yield of 1.62%.
In terms of dividend growth, the company's current annualized dividend of $1.76 is up 2.9% from last year. Colgate-Palmolive has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 3.26%. 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. Right now, Colgate-Palmolive's payout ratio is 60%, which means it paid out 60% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, CL expects solid earnings growth. The Zacks Consensus Estimate for 2020 is $2.96 per share, with earnings expected to increase 4.59% from the year ago period.
Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. However, not all companies offer 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. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. With that in mind, CL is a compelling investment opportunity. Not only is it a strong dividend play, but the stock currently sits at a Zacks Rank of 3 (Hold).