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
Based in Baltimore, Legg Mason (LM - Free Report) is in the Finance sector, and so far this year, shares have seen a price change of 46.06%. The money manager is currently shelling out a dividend of $0.4 per share, with a dividend yield of 4.29%. This compares to the Financial - Investment Management industry's yield of 2.6% and the S&P 500's yield of 1.87%.
In terms of dividend growth, the company's current annualized dividend of $1.60 is up 17.6% from last year. In the past five-year period, Legg Mason has increased its dividend 5 times on a year-over-year basis for an average annual increase of 19.62%. 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%. This means it paid out 45% of its trailing 12-month EPS as dividend.
LM is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2019 is $3.53 per share, representing a year-over-year earnings growth rate of 1,028.95%.
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.
Big, established firms that have more secure profits are often seen as the best dividend options, but it's fairly uncommon to see high-growth businesses or tech start-ups offer their stockholders a dividend. Income investors must be conscious of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, LM 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).