All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. But for income investors, generating consistent cash flow from each of your liquid investments is your primary focus.
While cash flow can come from bond interest or interest from other types of investments, income investors hone in on 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.
Penske Automotive in Focus
Based in Bloomfield Hills, Penske Automotive (PAG - Free Report) is in the Retail-Wholesale sector, and so far this year, shares have seen a price change of 5.13%. Currently paying a dividend of $0.38 per share, the company has a dividend yield of 3.59%. In comparison, the Automotive - Retail and Whole Sales industry's yield is 0.58%, while the S&P 500's yield is 1.96%.
In terms of dividend growth, the company's current annualized dividend of $1.52 is up 7% from last year. In the past five-year period, Penske Automotive has increased its dividend 5 times on a year-over-year basis for an average annual increase of 16.13%. 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. Penske's current payout ratio is 28%, meaning it paid out 28% of its trailing 12-month EPS as dividend.
PAG is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2019 is $5.60 per share, representing a year-over-year earnings growth rate of 4.87%.
From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. 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 must be conscious of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, PAG 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).