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Why International Paper (IP) is a Great Dividend Stock

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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. However, when you're an income investor, your primary focus is generating consistent cash flow from each of your liquid investments.

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

International Paper in Focus

Headquartered in Memphis, International Paper (IP - Free Report) is a Basic Materials stock that has seen a price change of -7.27% so far this year. The global paper and packaging company is paying out a dividend of $0.47 per share at the moment, with a dividend yield of 3.54% compared to the Paper and Related Products industry's yield of 1.59% and the S&P 500's yield of 1.77%.

In terms of dividend growth, the company's current annualized dividend of $1.90 is up 2% from last year. International Paper has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 8.88%. 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. International Paper's current payout ratio is 42%. This means it paid out 42% of its trailing 12-month EPS as dividend.

IP is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2018 is $5.23 per share, which represents a year-over-year growth rate of 49.86%.

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




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