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Why First American Financial (FAF) is a Great Dividend Stock Right Now

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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.

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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.

First American Financial in Focus

First American Financial (FAF - Free Report) is headquartered in Santa Ana, and is in the Finance sector. The stock has seen a price change of 29.41% since the start of the year. Currently paying a dividend of $0.42 per share, the company has a dividend yield of 2.91%. In comparison, the Insurance - Property and Casualty industry's yield is 1.23%, while the S&P 500's yield is 1.91%.

Looking at dividend growth, the company's current annualized dividend of $1.68 is up 5% from last year. Over the last 5 years, First American Financial has increased its dividend 5 times on a year-over-year basis for an average annual increase of 15.39%. 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. Right now, First American Financial's payout ratio is 34%, which means it paid out 34% of its trailing 12-month EPS as dividend.

Earnings growth looks solid for FAF for this fiscal year. The Zacks Consensus Estimate for 2019 is $4.86 per share, representing a year-over-year earnings growth rate of 15.99%.

Bottom Line

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.

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 FAF is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).


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