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 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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.
Target in Focus
Headquartered in Minneapolis, Target (TGT - Free Report) is a Retail-Wholesale stock that has seen a price change of 29.36% so far this year. The retailer is paying out a dividend of $0.64 per share at the moment, with a dividend yield of 3.03% compared to the Retail - Discount Stores industry's yield of 0.97% and the S&P 500's yield of 1.91%.
Looking at dividend growth, the company's current annualized dividend of $2.56 is up 4.9% from last year. Target has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 8.79%. 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. Target's current payout ratio is 49%, meaning it paid out 49% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, TGT expects solid earnings growth. The Zacks Consensus Estimate for 2018 is $5.38 per share, which represents a year-over-year growth rate of 14.23%.
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 have to be mindful of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, TGT presents a compelling investment opportunity; it's not only an attractive dividend play, but the stock also boasts a strong Zacks Rank of #2 (Buy).