Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. However, 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 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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.
Wells Fargo in Focus
Headquartered in San Francisco, Wells Fargo (WFC - Free Report) is a Finance stock that has seen a price change of -0.82% so far this year. The biggest U.S. mortgage lender is paying out a dividend of $0.45 per share at the moment, with a dividend yield of 3.94% compared to the Banks - Major Regional industry's yield of 2.86% and the S&P 500's yield of 1.97%.
Taking a look at the company's dividend growth, its current annualized dividend of $1.80 is up 9.8% from last year. In the past five-year period, Wells Fargo has increased its dividend 5 times on a year-over-year basis for an average annual increase of 4.27%. Looking ahead, future dividend growth will be dependent on earnings growth and payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Wells Fargo's current payout ratio is 39%, meaning it paid out 39% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for WFC for this fiscal year. The Zacks Consensus Estimate for 2019 is $4.75 per share, representing a year-over-year earnings growth rate of 10.98%.
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.
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 have to be mindful of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, WFC 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).