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.
While cash flow can come from bond interest or interest from other types of investments, income investors hone in on 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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.
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 16.49%. The railroad is paying out a dividend of $0.94 per share at the moment, with a dividend yield of 2.16% compared to the Transportation - Rail industry's yield of 1.54% and the S&P 500's yield of 1.92%.
Looking at 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%. 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. Norfolk Southern's current payout ratio is 33%, meaning 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, which represents a year-over-year growth rate of 12.20%.
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. Income investors have to be mindful of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. 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).