Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. 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.
Toronto-Dominion Bank in Focus
Based in Toronto, Toronto-Dominion Bank (TD - Free Report) is in the Finance sector, and so far this year, shares have seen a price change of -0.16%. The retail and wholesale bank is paying out a dividend of $0.57 per share at the moment, with a dividend yield of 4.07% compared to the Banks - Foreign industry's yield of 3.53% and the S&P 500's yield of 1.78%.
Taking a look at the company's dividend growth, its current annualized dividend of $2.28 is up 5.1% from last year. Toronto-Dominion Bank has increased its dividend 4 times on a year-over-year basis over the last 5 years for an average annual increase of 8.71%. 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. Toronto-Dominion's current payout ratio is 44%. This means it paid out 44% of its trailing 12-month EPS as dividend.
TD is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2020 is $5.21 per share, with earnings expected to increase 3.58% from the year ago period.
From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. 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. That said, they can take comfort from the fact that TD is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).