Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. 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.
Domtar in Focus
Headquartered in Fort Mill, Domtar (UFS - Free Report) is a Basic Materials stock that has seen a price change of -1.7% so far this year. The paper and packaging maker is paying out a dividend of $0.44 per share at the moment, with a dividend yield of 3.57% compared to the Paper and Related Products industry's yield of 1.21% and the S&P 500's yield of 1.81%.
In terms of dividend growth, the company's current annualized dividend of $1.74 is up 4.8% from last year. Domtar has increased its dividend 4 times on a year-over-year basis over the last 5 years for an average annual increase of 6.87%. 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. Right now, Domtar's payout ratio is 54%, which means it paid out 54% of its trailing 12-month EPS as dividend.
UFS is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2018 is $3.82 per share, which represents a year-over-year growth rate of 46.92%.
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.
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. 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 UFS is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #2 (Buy).