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.
Procter & Gamble in Focus
Headquartered in Cincinnati, Procter & Gamble (PG - Free Report) is a Consumer Staples stock that has seen a price change of -8.94% so far this year. The world's largest consumer products maker is currently shelling out a dividend of $0.72 per share, with a dividend yield of 3.43%. This compares to the Soap and Cleaning Materials industry's yield of 2.21% and the S&P 500's yield of 1.79%.
In terms of dividend growth, the company's current annualized dividend of $2.87 is up 3% from last year. Over the last 5 years, Procter & Gamble has increased its dividend 5 times on a year-over-year basis for an average annual increase of 2.99%. 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. P&G's current payout ratio is 68%, meaning it paid out 68% of its trailing 12-month EPS as dividend.
PG is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2018 is $4.42 per share, which represents a year-over-year growth rate of 4.74%.
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.
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 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 PG is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).