All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. But 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.
Praxair in Focus
Headquartered in Danbury, Praxair is a Basic Materials stock that has seen a price change of 5.42% so far this year. Currently paying a dividend of $0.82 per share, the company has a dividend yield of 2.02%. In comparison, the Chemical - Diversified industry's yield is 1.61%, while the S&P 500's yield is 1.79%.
Looking at dividend growth, the company's current annualized dividend of $3.30 is up 4.8% from last year. Over the last 5 years, Praxair has increased its dividend 5 times on a year-over-year basis for an average annual increase of 6.66%. 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. Praxair's current payout ratio is 52%, meaning it paid out 52% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for PX for this fiscal year. The Zacks Consensus Estimate for 2018 is $6.77 per share, with earnings expected to increase 15.73% from the year ago period.
Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. 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 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 PX is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #2 (Buy).