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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.
Merck in Focus
Headquartered in Kenilworth, Merck (MRK - Free Report) is a Medical stock that has seen a price change of 8.14% so far this year. The pharmaceutical company is paying out a dividend of $0.55 per share at the moment, with a dividend yield of 2.66% compared to the Large Cap Pharmaceuticals industry's yield of 2.7% and the S&P 500's yield of 1.93%.
In terms of dividend growth, the company's current annualized dividend of $2.20 is up 10.6% from last year. Merck has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 2.88%. Future dividend growth will depend on earnings growth as well as payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Merck's current payout ratio is 51%. This means it paid out 51% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for MRK for this fiscal year. The Zacks Consensus Estimate for 2019 is $4.65 per share, with earnings expected to increase 7.14% 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. But, not every company offers 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 must be conscious of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, MRK 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).