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 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.
International Paper in Focus
Based in Memphis, International Paper (IP - Free Report) is in the Basic Materials sector, and so far this year, shares have seen a price change of 2%. The global paper and packaging company is paying out a dividend of $3.67 per share at the moment, with a dividend yield of 42% compared to the Paper and Related Products industry's yield of 49.28% and the S&P 500's yield of 0.47%.
Looking at dividend growth, the company's current annualized dividend of $3.39 is up 8.9% from last year. International Paper has increased its dividend 2.70 times on a year-over-year basis over the last 5 years for an average annual increase of 5%. 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. International Paper's current payout ratio is -10.75%. This means it paid out -10.75% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, IP expects solid earnings growth. The Zacks Consensus Estimate for 2018 is $1.90 per share, with earnings expected to increase 5.73% from the year ago period.
From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. However, not all companies offer a quarterly payout.
Big, established firms that have more secure profits are often seen as the best dividend options, but it's fairly uncommon to see high-growth businesses or tech start-ups offer their stockholders a dividend. 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).