All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. 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 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.
Union Pacific in Focus
Based in Omaha, Union Pacific (UNP - Free Report) is in the Transportation sector, and so far this year, shares have seen a price change of 15.18%. The railroad is currently shelling out a dividend of $0.8 per share, with a dividend yield of 2.07%. This compares to the Transportation - Rail industry's yield of 1.18% and the S&P 500's yield of 1.88%.
Taking a look at the company's dividend growth, its current annualized dividend of $3.20 is up 29% from last year. Over the last 5 years, Union Pacific has increased its dividend 4 times on a year-over-year basis for an average annual increase of 11.55%. 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. Union Pacific's current payout ratio is 44%. This means it paid out 44% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for UNP for this fiscal year. The Zacks Consensus Estimate for 2018 is $7.79 per share, which represents a year-over-year growth rate of 34.54%.
From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. But, not every company offers 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 must be conscious 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 UNP is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).