Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. 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.
Eli Lilly in Focus
Based in Indianapolis, Eli Lilly (LLY - Free Report) is in the Medical sector, and so far this year, shares have seen a price change of 11.68%. Currently paying a dividend of $0.74 per share, the company has a dividend yield of 2.02%. In comparison, the Large Cap Pharmaceuticals industry's yield is 2.29%, while the S&P 500's yield is 1.59%.
In terms of dividend growth, the company's current annualized dividend of $2.96 is up 14.7% from last year. Over the last 5 years, Eli Lilly has increased its dividend 5 times on a year-over-year basis for an average annual increase of 9.14%. 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, Lilly's payout ratio is 43%, which means it paid out 43% of its trailing 12-month EPS as dividend.
LLY is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2020 is $7.31 per share, with earnings expected to increase 21.03% from the year ago period.
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.
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. With that in mind, LLY 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).