All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. 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 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.
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 -2.85%. Currently paying a dividend of $0.64 per share, the company has a dividend yield of 2.29%. In comparison, the Large Cap Pharmaceuticals industry's yield is 3.08%, while the S&P 500's yield is 1.92%.
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 4.89%. 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. Right now, Lilly's payout ratio is 46%, which means it paid out 46% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, LLY expects solid earnings growth. The Zacks Consensus Estimate for 2019 is $5.70 per share, representing a year-over-year earnings growth rate of 2.70%.
Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. But, not every company offers 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. 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 LLY is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).