All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. 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.
Eli Lilly in Focus
Eli Lilly (LLY - Free Report) is headquartered in Indianapolis, and is in the Medical sector. The stock has seen a price change of 8.2% since the start of the year. Currently paying a dividend of $2.12 per share, the company has a dividend yield of 45%. In comparison, the Large Cap Pharmaceuticals industry's yield is 27.8%, while the S&P 500's yield is 0.56%.
Looking at dividend growth, the company's current annualized dividend of $2.84 is up 2.5% from last year. Eli Lilly has increased its dividend 8.20 times on a year-over-year basis over the last 5 years for an average annual increase of 4%. 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. Lilly's current payout ratio is 25.47%, meaning it paid out 25.47% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, LLY expects solid earnings growth. The Zacks Consensus Estimate for 2018 is $2.25 per share, representing a year-over-year earnings growth rate of 5.73%.
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.
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, LLY 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).