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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.
Capital Southwest in Focus
Based in Dallas, Capital Southwest (CSWC - Free Report) is in the Finance sector, and so far this year, shares have seen a price change of 16.92%. The business development company is currently shelling out a dividend of $0.44 per share, with a dividend yield of 7.03%. This compares to the Financial - Investment Management industry's yield of 2.89% and the S&P 500's yield of 1.92%.
Taking a look at the company's dividend growth, its current annualized dividend of $1.36 is up 37.4% from last year. Capital Southwest has increased its dividend 3 times on a year-over-year basis over the last 5 years for an average annual increase of 61.76%. 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. Right now, Capital Southwest's payout ratio is 115%, which means it paid out 115% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for CSWC for this fiscal year. The Zacks Consensus Estimate for 2018 is $1.28 per share, which represents a year-over-year growth rate of 26.73%.
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.
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 CSWC is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).