All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. But for income investors, generating consistent cash flow from each of your liquid investments is your primary focus.
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.
Norfolk Southern in Focus
Based in Norfolk, Norfolk Southern (NSC - Free Report) is in the Transportation sector, and so far this year, shares have seen a price change of 20.32%. The railroad is paying out a dividend of $0.94 per share at the moment, with a dividend yield of 2.09% compared to the Transportation - Rail industry's yield of 1.53% and the S&P 500's yield of 1.99%.
In terms of dividend growth, the company's current annualized dividend of $3.76 is up 23.7% from last year. Norfolk Southern has increased its dividend 4 times on a year-over-year basis over the last 5 years for an average annual increase of 8.74%. 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. Norfolk Southern's current payout ratio is 33%. This means it paid out 33% of its trailing 12-month EPS as dividend.
NSC is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2019 is $10.67 per share, representing a year-over-year earnings growth rate of 12.20%.
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.
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. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. With that in mind, NSC 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).