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.
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.
Target in Focus
Based in Minneapolis, Target (TGT - Free Report) is in the Retail-Wholesale sector, and so far this year, shares have seen a price change of 68.12%. The retailer is paying out a dividend of $0.66 per share at the moment, with a dividend yield of 2.38% compared to the Retail - Discount Stores industry's yield of 0.84% and the S&P 500's yield of 1.82%.
Taking a look at the company's dividend growth, its current annualized dividend of $2.64 is up 4.8% from last year. In the past five-year period, Target has increased its dividend 5 times on a year-over-year basis for an average annual increase of 5.10%. 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. Target's current payout ratio is 43%. This means it paid out 43% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for TGT for this fiscal year. The Zacks Consensus Estimate for 2019 is $6.17 per share, with earnings expected to increase 14.47% from the year ago period.
Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. However, not all companies offer 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. That said, they can take comfort from the fact that TGT is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #2 (Buy).