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.
Financial Institutions in Focus
Headquartered in Warsaw, Financial Institutions is a Finance stock that has seen a price change of 10.66% so far this year. The holding company for Five Star Bank is paying out a dividend of $0.25 per share at the moment, with a dividend yield of 3.52% compared to the Banks - Northeast industry's yield of 1.88% and the S&P 500's yield of 1.98%.
Taking a look at the company's dividend growth, its current annualized dividend of $1 is up 4.2% from last year. Over the last 5 years, Financial Institutions has increased its dividend 4 times on a year-over-year basis for an average annual increase of 5.82%. 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. Financial Institutions's current payout ratio is 38%, meaning it paid out 38% of its trailing 12-month EPS as dividend.
FISI is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2019 is $2.76 per share, which represents a year-over-year growth rate of 7.39%.
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.
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. Income investors must be conscious of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. That said, they can take comfort from the fact that FISI is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #2 (Buy).