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Is First American Financial (FAF) a Great Dividend Play?

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All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. 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 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

Headquartered in Santa Ana, First American Financial (FAF - Free Report) is a Finance stock that has seen a price change of -1.02% so far this year. Currently paying a dividend of $0.38 per share, the company has a dividend yield of 2.74%. In comparison, the Insurance - Property and Casualty industry's yield is 1.45%, while the S&P 500's yield is 1.78%.

Taking a look at the company's dividend growth, its current annualized dividend of $1.52 is up 5.6% from last year. Over the last 5 years, First American Financial has increased its dividend 5 times on a year-over-year basis for an average annual increase of 25.52%. 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 37%. This means it paid out 37% of its trailing 12-month EPS as dividend.

Looking at this fiscal year, FAF expects solid earnings growth. The Zacks Consensus Estimate for 2018 is $4.52 per share, which represents a year-over-year growth rate of 64.36%.

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. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. 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).




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