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.
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.
Federated Investors in Focus
Headquartered in Pittsburgh, Federated Investors (FII - Free Report) is a Finance stock that has seen a price change of 21.24% so far this year. The one of the nation's largest managers of money market funds is currently shelling out a dividend of $0.27 per share, with a dividend yield of 3.36%. This compares to the Financial - Investment Management industry's yield of 2.98% and the S&P 500's yield of 1.93%.
In terms of dividend growth, the company's current annualized dividend of $1.08 is up 1.9% from last year. Over the last 5 years, Federated Investors has increased its dividend 1 times on a year-over-year basis for an average annual increase of 1.49%. 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. Right now, Federated Investors's payout ratio is 45%, which means it paid out 45% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for FII for this fiscal year. The Zacks Consensus Estimate for 2019 is $2.49 per share, representing a year-over-year earnings growth rate of 14.22%.
From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. But, not every company offers 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. That said, they can take comfort from the fact that FII is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #2 (Buy).