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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.
Principal Financial in Focus
Headquartered in Des Moines, Principal Financial (PFG - Free Report) is a Finance stock that has seen a price change of 20.01% so far this year. The financial services company is currently shelling out a dividend of $0.54 per share, with a dividend yield of 4.07%. This compares to the Financial - Investment Management industry's yield of 3.22% and the S&P 500's yield of 2.04%.
Looking at dividend growth, the company's current annualized dividend of $2.16 is up 2.9% from last year. In the past five-year period, Principal Financial has increased its dividend 5 times on a year-over-year basis for an average annual increase of 12%. 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. Principal Financial's current payout ratio is 39%. This means it paid out 39% of its trailing 12-month EPS as dividend.
PFG is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2019 is $5.69 per share, with earnings expected to increase 2.89% from the year ago period.
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 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 PFG is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).