All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. 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 that coveted distribution of a company's earnings paid out to shareholders, and investors often view it by its dividend yield, a metric that measures the 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.
Legg Mason in Focus
Headquartered in Baltimore, Legg Mason (LM - Free Report) is a Finance stock that has seen a price change of 47.55% so far this year. Currently paying a dividend of $0.4 per share, the company has a dividend yield of 4.25%. In comparison, the Financial - Investment Management industry's yield is 2.87%, while the S&P 500's yield is 1.93%.
In terms of dividend growth, the company's current annualized dividend of $1.60 is up 17.6% from last year. Legg Mason has increased its dividend 4 times on a year-over-year basis over the last 5 years for an average annual increase of 19.23%. Looking ahead, future dividend growth will be dependent on earnings growth and payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Legg Mason's current payout ratio is 45%, meaning it paid out 45% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for LM for this fiscal year. The Zacks Consensus Estimate for 2019 is $3.64 per share, representing a year-over-year earnings growth rate of 1,057.89%.
From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. 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 LM is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).