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 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.
Legg Mason in Focus
Based in Baltimore, Legg Mason is in the Finance sector, and so far this year, shares have seen a price change of 51%. The money manager is currently shelling out a dividend of $0.4 per share, with a dividend yield of 4.15%. This compares to the Financial - Investment Management industry's yield of 2.3% and the S&P 500's yield of 1.84%.
Taking a look at the company's dividend growth, its 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%. 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. Legg Mason's current payout ratio is 51%, meaning it paid out 51% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, LM expects solid earnings growth. The Zacks Consensus Estimate for 2019 is $3.61 per share, which represents a year-over-year growth rate of 1,050%.
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.
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. 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).