All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. 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.
First Midwest Bancorp in Focus
Based in Chicago, First Midwest Bancorp (FMBI - Free Report) is in the Finance sector, and so far this year, shares have seen a price change of 1.06%. Currently paying a dividend of $0.12 per share, the company has a dividend yield of 2.4%. In comparison, the Banks - Midwest industry's yield is 2.56%, while the S&P 500's yield is 2.03%.
Taking a look at the company's dividend growth, its current annualized dividend of $0.48 is up 6.7% from last year. In the past five-year period, First Midwest Bancorp has increased its dividend 3 times on a year-over-year basis for an average annual increase of 8.26%. 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. First Midwest Bancorp's current payout ratio is 27%, meaning it paid out 27% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, FMBI expects solid earnings growth. The Zacks Consensus Estimate for 2019 is $1.96 per share, which represents a year-over-year growth rate of 17.37%.
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. With that in mind, FMBI 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).