Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. But for income investors, generating consistent cash flow from each of your liquid investments is your primary focus.
While cash flow can come from bond interest or interest from other types of investments, income investors hone in on 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.
Telephone & Data Systems in Focus
Headquartered in Chicago, Telephone & Data Systems (TDS - Free Report) is a Utilities stock that has seen a price change of 9.57% so far this year. The parent of U.S. Cellular and TDS Telecom is paying out a dividend of $0.16 per share at the moment, with a dividend yield of 2.1% compared to the Wireline - National industry's yield of 2.38% and the S&P 500's yield of 1.78%.
In terms of dividend growth, the company's current annualized dividend of $0.64 is up 3.2% from last year. Over the last 5 years, Telephone & Data Systems has increased its dividend 5 times on a year-over-year basis for an average annual increase of 4.91%. 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. Right now, TDS's payout ratio is 114%, which means it paid out 114% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for TDS for this fiscal year. The Zacks Consensus Estimate for 2018 is $0.68 per share, representing a year-over-year earnings growth rate of 28.30%.
Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. 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 TDS is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).