Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. 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.
Merck in Focus
Headquartered in Kenilworth, Merck (MRK - Free Report) is a Medical stock that has seen a price change of 9.42% so far this year. The pharmaceutical company is currently shelling out a dividend of $0.55 per share, with a dividend yield of 2.63%. This compares to the Large Cap Pharmaceuticals industry's yield of 2.8% and the S&P 500's yield of 1.93%.
In terms of dividend growth, the company's current annualized dividend of $2.20 is up 10.6% from last year. In the past five-year period, Merck has increased its dividend 5 times on a year-over-year basis for an average annual increase of 4.01%. Any future dividend growth will depend on both earnings growth and the company's payout ratio; a payout ratio is the proportion of a firm's annual earnings per share that it pays out as a dividend. Right now, Merck's payout ratio is 46%, which means it paid out 46% of its trailing 12-month EPS as dividend.
MRK is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2019 is $4.92 per share, which represents a year-over-year growth rate of 13.36%.
Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. 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. With that in mind, MRK presents a compelling investment opportunity; it's not only an attractive dividend play, but the stock also boasts a strong Zacks Rank of #2 (Buy).