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Why First American Financial (FAF) is a Top Dividend Stock for Your Portfolio

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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. 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 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.

First American Financial in Focus

Headquartered in Santa Ana, First American Financial (FAF - Free Report) is a Finance stock that has seen a price change of 32.97% so far this year. The financial services company is paying out a dividend of $0.42 per share at the moment, with a dividend yield of 2.83% compared to the Insurance - Property and Casualty industry's yield of 1.16% and the S&P 500's yield of 1.88%.

Looking at dividend growth, the company's current annualized dividend of $1.68 is up 5% from last year. In the past five-year period, 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. First American Financial's current payout ratio is 34%, meaning it paid out 34% of its trailing 12-month EPS as dividend.

Looking at this fiscal year, FAF expects solid earnings growth. The Zacks Consensus Estimate for 2019 is $4.93 per share, which represents a year-over-year growth rate of 17.66%.

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.

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 have to be mindful of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, FAF 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).


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