Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. But when you're an income investor, your primary focus is generating consistent cash flow from each of your liquid investments.
While cash flow can come from bond interest or interest from other types of investments, income investors hone in on 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.
First Midwest Bancorp in Focus
Headquartered in Chicago, First Midwest Bancorp (FMBI - Free Report) is a Finance stock that has seen a price change of 8.43% so far this year. The holding company for First Midwest Bank is paying out a dividend of $0.12 per share at the moment, with a dividend yield of 2.23% compared to the Banks - Midwest industry's yield of 2.26% and the S&P 500's yield of 1.97%.
In terms of dividend growth, the company's current annualized dividend of $0.48 is up 6.7% from last year. First Midwest Bancorp has increased its dividend 4 times on a year-over-year basis over the last 5 years for an average annual increase of 8.59%. 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, First Midwest Bancorp's payout ratio is 29%, which means it paid out 29% of its trailing 12-month EPS as dividend.
FMBI is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2019 is $1.98 per share, which represents a year-over-year growth rate of 18.56%.
Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. It's important to keep in mind that not all companies provide 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. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. With that in mind, FMBI is a compelling investment opportunity. Not only is it a strong dividend play, but the stock currently sits at a Zacks Rank of 3 (Hold).