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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.
Merck in Focus
Based in Kenilworth, Merck (MRK - Free Report) is in the Medical sector, and so far this year, shares have seen a price change of 25.56%. The pharmaceutical company is currently shelling out a dividend of $0.48 per share, with a dividend yield of 2.72%. This compares to the Large Cap Pharmaceuticals industry's yield of 2.55% and the S&P 500's yield of 1.79%.
Taking a look at the company's dividend growth, its current annualized dividend of $1.92 is up 1.6% from last year. Over the last 5 years, Merck has increased its dividend 5 times on a year-over-year basis for an average annual increase of 2.23%. 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. Right now, Merck's payout ratio is 46%, which means it paid out 46% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, MRK expects solid earnings growth. The Zacks Consensus Estimate for 2018 is $4.27 per share, representing a year-over-year earnings growth rate of 7.29%.
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.
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. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. That said, they can take comfort from the fact that MRK is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).