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.
Northern Trust in Focus
Northern Trust (NTRS - Free Report) is headquartered in Chicago, and is in the Finance sector. The stock has seen a price change of 16.62% since the start of the year. The wealth management firm is paying out a dividend of $0.6 per share at the moment, with a dividend yield of 2.46% compared to the Banks - Major Regional industry's yield of 2.77% and the S&P 500's yield of 1.93%.
In terms of dividend growth, the company's current annualized dividend of $2.40 is up 23.7% from last year. In the past five-year period, Northern Trust has increased its dividend 5 times on a year-over-year basis for an average annual increase of 11.25%. 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, Northern Trust's payout ratio is 36%, which means it paid out 36% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for NTRS for this fiscal year. The Zacks Consensus Estimate for 2019 is $6.80 per share, which represents a year-over-year growth rate of 2.41%.
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.
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. That said, they can take comfort from the fact that NTRS is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #2 (Buy).