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.
Cash flow can come from bond interest, interest from other types of investments, and of course, 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.
Bank of America in Focus
Headquartered in Charlotte, Bank of America (BAC - Free Report) is a Finance stock that has seen a price change of 21.27% so far this year. The nation's second-largest bank is currently shelling out a dividend of $0.15 per share, with a dividend yield of 2.01%. This compares to the Banks - Major Regional industry's yield of 2.87% and the S&P 500's yield of 1.89%.
Looking at dividend growth, the company's current annualized dividend of $0.60 is up 11.1% from last year. Bank of America has increased its dividend 4 times on a year-over-year basis over the last 5 years for an average annual increase of 45.58%. 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. Bank of America's current payout ratio is 23%. This means it paid out 23% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for BAC for this fiscal year. The Zacks Consensus Estimate for 2019 is $2.86 per share, representing a year-over-year earnings growth rate of 9.58%.
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.
High-growth firms or tech start-ups, for example, rarely provide their shareholders a dividend, while larger, more established companies that have more secure profits are often seen as the best dividend options. 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, BAC 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).