All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. 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 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.
Rockwell Automation in Focus
Based in Milwaukee, Rockwell Automation (ROK - Free Report) is in the Industrial Products sector, and so far this year, shares have seen a price change of -8.85%. The industrial equipment and software maker is paying out a dividend of $0.92 per share at the moment, with a dividend yield of 2.06% compared to the Industrial Automation and Robotics industry's yield of 0.22% and the S&P 500's yield of 1.86%.
Taking a look at the company's dividend growth, its current annualized dividend of $3.68 is up 4.8% from last year. Over the last 5 years, Rockwell Automation has increased its dividend 5 times on a year-over-year basis for an average annual increase of 10.04%. 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. Right now, Rockwell Automation's payout ratio is 48%, which means it paid out 48% of its trailing 12-month EPS as dividend.
ROK is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2018 is $8.98 per share, which represents a year-over-year growth rate of 10.73%.
Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. However, not all companies offer a quarterly payout.
For instance, it's a rare occurrence when a tech start-up or big growth business offers their shareholders a dividend. It's more common to see larger companies with more established profits give out dividends. 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 ROK is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #2 (Buy).