All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. However, 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.
Penske Automotive in Focus
Headquartered in Bloomfield Hills, Penske Automotive (PAG - Free Report) is a Retail-Wholesale stock that has seen a price change of 3.13% so far this year. Currently paying a dividend of $0.41 per share, the company has a dividend yield of 3.17%. In comparison, the Automotive - Retail and Whole Sales industry's yield is 0.44%, while the S&P 500's yield is 1.75%.
In terms of dividend growth, the company's current annualized dividend of $1.64 is up 3.8% from last year. In the past five-year period, Penske Automotive has increased its dividend 5 times on a year-over-year basis for an average annual increase of 13.84%. 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. Right now, Penske's payout ratio is 31%, which means it paid out 31% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, PAG expects solid earnings growth. The Zacks Consensus Estimate for 2020 is $5.66 per share, with earnings expected to increase 7.20% 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. However, not all companies offer a quarterly payout.
For instance, it's a rare occurrence when a tech start-up or big growth business offers their shareholders a dividend. It's more common to see larger companies with more established profits give out dividends. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. With that in mind, PAG 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).