Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. 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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.
Mercury General in Focus
Headquartered in Los Angeles, Mercury General (MCY - Free Report) is a Finance stock that has seen a price change of -1.83% so far this year. Currently paying a dividend of $0.63 per share, the company has a dividend yield of 4.77%. In comparison, the Insurance - Property and Casualty industry's yield is 1.5%, while the S&P 500's yield is 1.77%.
Looking at dividend growth, the company's current annualized dividend of $2.50 is up 0.3% from last year. In the past five-year period, Mercury General has increased its dividend 5 times on a year-over-year basis for an average annual increase of 0.41%. 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. Right now, Mercury General's payout ratio is 147%, which means it paid out 147% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for MCY for this fiscal year. The Zacks Consensus Estimate for 2018 is $2.20 per share, which represents a year-over-year growth rate of 34.15%.
Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. However, not all companies offer 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. With that in mind, MCY presents a compelling investment opportunity; it's not only an attractive dividend play, but the stock also boasts a strong Zacks Rank of #2 (Buy).