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 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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.
Scotts Miracle-Gro in Focus
Based in Marysville, Scotts Miracle-Gro (SMG - Free Report) is in the Basic Materials sector, and so far this year, shares have seen a price change of 53.16%. The lawn and garden products company is currently shelling out a dividend of $0.55 per share, with a dividend yield of 2.34%. This compares to the Fertilizers industry's yield of 1.06% and the S&P 500's yield of 1.96%.
Taking a look at the company's dividend growth, its current annualized dividend of $2.20 is up 2.8% from last year. In the past five-year period, Scotts Miracle-Gro has increased its dividend 5 times on a year-over-year basis for an average annual increase of 5.28%. 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. Scotts's current payout ratio is 53%, meaning it paid out 53% of its trailing 12-month EPS as dividend.
SMG is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2019 is $4.28 per share, which represents a year-over-year growth rate of 15.36%.
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.
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. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. That said, they can take comfort from the fact that SMG is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).