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 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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.
Timken in Focus
Headquartered in North Canton, Timken (TKR - Free Report) is an Industrial Products stock that has seen a price change of -3.87% so far this year. The maker of bearings and power transmissions is paying out a dividend of $0.28 per share at the moment, with a dividend yield of 2.37% compared to the Metal Products - Procurement and Fabrication industry's yield of 1.01% and the S&P 500's yield of 1.79%.
Looking at dividend growth, the company's current annualized dividend of $1.12 is up 4.7% from last year. In the past five-year period, Timken has increased its dividend 4 times on a year-over-year basis for an average annual increase of 3.08%. Looking ahead, future dividend growth will be dependent on earnings growth and payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Timken's current payout ratio is 32%. This means it paid out 32% of its trailing 12-month EPS as dividend.
TKR is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2018 is $4.17 per share, representing a year-over-year earnings growth rate of 58.56%.
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.
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 TKR is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).