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 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.
Bank of America in Focus
Headquartered in Charlotte, Bank of America (BAC - Free Report) is a Finance stock that has seen a price change of 11.73% so far this year. Currently paying a dividend of $0.15 per share, the company has a dividend yield of 2.18%. In comparison, the Banks - Major Regional industry's yield is 3%, while the S&P 500's yield is 1.96%.
Taking a look at the company's dividend growth, its current annualized dividend of $0.60 is up 11.1% from last year. Bank of America has increased its dividend 4 times on a year-over-year basis over the last 5 years for an average annual increase of 45.58%. 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. Bank of America's current payout ratio is 22%. This means it paid out 22% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for BAC for this fiscal year. The Zacks Consensus Estimate for 2019 is $2.86 per share, with earnings expected to increase 9.58% from the year ago period.
Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. However, not all companies offer a quarterly payout.
Big, established firms that have more secure profits are often seen as the best dividend options, but it's fairly uncommon to see high-growth businesses or tech start-ups offer their stockholders a dividend. 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, BAC 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).