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Why First Merchants (FRME) is a Top Dividend Stock for Your Portfolio

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Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. But for income investors, generating consistent cash flow from each of your liquid investments is your primary focus.

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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.

First Merchants in Focus

Headquartered in Muncie, First Merchants (FRME - Free Report) is a Finance stock that has seen a price change of 2.63% so far this year. The bank is currently shelling out a dividend of $0.32 per share, with a dividend yield of 2.98%. This compares to the Banks - Midwest industry's yield of 2.7% and the S&P 500's yield of 1.6%.

Taking a look at the company's dividend growth, its current annualized dividend of $1.28 is up 13.3% from last year. In the past five-year period, First Merchants has increased its dividend 4 times on a year-over-year basis for an average annual increase of 11.27%. 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 Merchants's current payout ratio is 34%. This means it paid out 34% of its trailing 12-month EPS as dividend.

FRME is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2022 is $4.04 per share, with earnings expected to increase 6.04% from the year ago period.

Bottom Line

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.

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 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 FRME is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).


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