Back to top

Image: Bigstock

This is Why First American Financial (FAF) is a Great Dividend Stock

Read MoreHide Full Article

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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.

First American Financial in Focus

First American Financial (FAF - Free Report) is headquartered in Santa Ana, and is in the Finance sector. The stock has seen a price change of 10.23% since the start of the year. The financial services company is paying out a dividend of $0.46 per share at the moment, with a dividend yield of 3.23% compared to the Insurance - Property and Casualty industry's yield of 1.32% and the S&P 500's yield of 1.41%.

Taking a look at the company's dividend growth, its current annualized dividend of $1.84 is up 3.4% from last year. Over the last 5 years, First American Financial has increased its dividend 4 times on a year-over-year basis for an average annual increase of 10.38%. Future dividend growth will depend on earnings growth as well as payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. First American Financial's current payout ratio is 33%, meaning it paid out 33% of its trailing 12-month EPS as dividend.

FAF is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2021 is $5.49 per share, which represents a year-over-year growth rate of 0.73%.

Bottom Line

From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. 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 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 FAF is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).


In-Depth Zacks Research for the Tickers Above


Normally $25 each - click below to receive one report FREE:


First American Financial Corporation (FAF) - free report >>

Published in