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 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
Headquartered in Chicago, Northern Trust (NTRS - Free Report) is a Finance stock that has seen a price change of 4.87% so far this year. The wealth management firm is paying out a dividend of $0.6 per share at the moment, with a dividend yield of 2.74% compared to the Banks - Major Regional industry's yield of 2.9% and the S&P 500's yield of 2.03%.
Looking at dividend growth, the company's current annualized dividend of $2.40 is up 23.7% from last year. Over the last 5 years, Northern Trust has increased its dividend 5 times on a year-over-year basis for an average annual increase of 11.25%. Any future dividend growth will depend on both earnings growth and the company's payout ratio; a payout ratio is the proportion of a firm's annual earnings per share that it pays out as a dividend. Northern Trust's current payout ratio is 36%, meaning it paid out 36% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, NTRS expects solid earnings growth. The Zacks Consensus Estimate for 2019 is $6.80 per share, with earnings expected to increase 2.41% 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. It's important to keep in mind that not all companies provide 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 NTRS is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).