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.
Cash flow can come from bond interest, interest from other types of investments, and of course, 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.
KLA-Tencor in Focus
Based in Milpitas, KLA-Tencor (KLAC - Free Report) is in the Computer and Technology sector, and so far this year, shares have seen a price change of -4.27%. Currently paying a dividend of $0.75 per share, the company has a dividend yield of 2.98%. In comparison, the Semiconductor Equipment - Wafer Fabrication industry's yield is 2.02%, while the S&P 500's yield is 1.8%.
Taking a look at the company's dividend growth, its current annualized dividend of $3 is up 19% from last year. KLA-Tencor has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 7.54%. 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. KLA-Tencor's current payout ratio is 37%, meaning it paid out 37% of its trailing 12-month EPS as dividend.
KLAC is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2018 is $9.28 per share, with earnings expected to increase 16% 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. But, not every company offers 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. 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 KLAC is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #1 (Strong Buy).