Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. 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.
Honda Motor in Focus
Headquartered in Tokyo, Honda Motor (HMC - Free Report) is an Auto-Tires-Trucks stock that has seen a price change of -18.78% so far this year. Currently paying a dividend of $0.2 per share, the company has a dividend yield of 2.83%. In comparison, the Automotive - Foreign industry's yield is 0.75%, while the S&P 500's yield is 1.95%.
Taking a look at the company's dividend growth, its current annualized dividend of $0.78 is up 36.8% from last year. Over the last 5 years, Honda Motor has increased its dividend 2 times on a year-over-year basis for an average annual increase of 0.08%. 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. Honda's current payout ratio is 20%. This means it paid out 20% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for HMC for this fiscal year. The Zacks Consensus Estimate for 2018 is $3.72 per share, with earnings expected to increase 2.76% from the year ago period.
Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. However, not all companies offer 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. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. That said, they can take comfort from the fact that HMC is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).