All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. But 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.
Union Pacific in Focus
Union Pacific (UNP - Free Report) is headquartered in Omaha, and is in the Transportation sector. The stock has seen a price change of 24.78% since the start of the year. The railroad is paying out a dividend of $0.88 per share at the moment, with a dividend yield of 2.04% compared to the Transportation - Rail industry's yield of 1.27% and the S&P 500's yield of 1.99%.
Taking a look at the company's dividend growth, its current annualized dividend of $3.52 is up 15% from last year. In the past five-year period, Union Pacific has increased its dividend 4 times on a year-over-year basis for an average annual increase of 11.97%. 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. Union Pacific's current payout ratio is 43%, meaning it paid out 43% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, UNP expects solid earnings growth. The Zacks Consensus Estimate for 2019 is $9.07 per share, representing a year-over-year earnings growth rate of 14.66%.
Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. However, not all companies offer 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. With that in mind, UNP 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).