Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. 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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.
Fifth Third Bancorp in Focus
Headquartered in Cincinnati, Fifth Third Bancorp (FITB - Free Report) is a Finance stock that has seen a price change of 13.05% so far this year. The regional bank is paying out a dividend of $0.22 per share at the moment, with a dividend yield of 3.31% compared to the Banks - Major Regional industry's yield of 2.83% and the S&P 500's yield of 1.97%.
In terms of dividend growth, the company's current annualized dividend of $0.88 is up 18.9% from last year. Fifth Third Bancorp has increased its dividend 4 times on a year-over-year basis over the last 5 years for an average annual increase of 9.41%. 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. Fifth Third's current payout ratio is 35%. This means it paid out 35% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, FITB expects solid earnings growth. The Zacks Consensus Estimate for 2019 is $2.76 per share, with earnings expected to increase 8.51% from the year ago period.
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.
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, FITB 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).