Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. 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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.
Eli Lilly in Focus
Based in Indianapolis, Eli Lilly (LLY - Free Report) is in the Medical sector, and so far this year, shares have seen a price change of -3.44%. The drugmaker is currently shelling out a dividend of $0.64 per share, with a dividend yield of 2.31%. This compares to the Large Cap Pharmaceuticals industry's yield of 3.04% and the S&P 500's yield of 1.94%.
In terms of dividend growth, the company's current annualized dividend of $2.58 is up 14.7% from last year. Eli Lilly has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 4.06%. Future dividend growth will depend on earnings growth as well as payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Lilly's current payout ratio is 46%. This means it paid out 46% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for LLY for this fiscal year. The Zacks Consensus Estimate for 2019 is $5.66 per share, representing a year-over-year earnings growth rate of 1.98%.
Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. 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 have to be mindful of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, LLY 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).