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.
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.
Prosperity Bancshares in Focus
Headquartered in Houston, Prosperity Bancshares (PB - Free Report) is a Finance stock that has seen a price change of 11.01% so far this year. Currently paying a dividend of $0.41 per share, the company has a dividend yield of 2.37%. In comparison, the Banks - Southwest industry's yield is 1.42%, while the S&P 500's yield is 1.87%.
In terms of dividend growth, the company's current annualized dividend of $1.64 is up 10.1% from last year. In the past five-year period, Prosperity Bancshares has increased its dividend 5 times on a year-over-year basis for an average annual increase of 10.72%. 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. Prosperity Bancshares's current payout ratio is 35%. This means it paid out 35% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, PB expects solid earnings growth. The Zacks Consensus Estimate for 2019 is $4.76 per share, with earnings expected to increase 3.25% from the year ago period.
Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. 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. Income investors have to be mindful 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 PB is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #2 (Buy).