Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. But 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.
Eli Lilly in Focus
Headquartered in Indianapolis, Eli Lilly (LLY - Free Report) is a Medical stock that has seen a price change of 27.76% so far this year. The drugmaker is currently shelling out a dividend of $0.56 per share, with a dividend yield of 2.09%. This compares to the Large Cap Pharmaceuticals industry's yield of 2.61% and the S&P 500's yield of 1.93%.
Taking a look at the company's dividend growth, its current annualized dividend of $2.25 is up 8.2% from last year. Over the last 5 years, Eli Lilly has increased its dividend 4 times on a year-over-year basis for an average annual increase of 2.82%. 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. Lilly's current payout ratio is 45%, meaning it paid out 45% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for LLY for this fiscal year. The Zacks Consensus Estimate for 2018 is $5.47 per share, with earnings expected to increase 27.80% from the year ago period.
From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. It's important to keep in mind that not all companies provide 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. 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 LLY is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #2 (Buy).