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.
Cash flow can come from bond interest, interest from other types of investments, and of course, 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.
1st Source in Focus
1st Source (SRCE) is headquartered in South Bend, and is in the Finance sector. The stock has seen a price change of -8.13% since the start of the year. The holding company for 1st Source Bank is paying out a dividend of $0.29 per share at the moment, with a dividend yield of 2.43% compared to the Banks - Midwest industry's yield of 2.52% and the S&P 500's yield of 1.78%.
In terms of dividend growth, the company's current annualized dividend of $1.16 is up 5.5% from last year. In the past five-year period, 1st Source has increased its dividend 4 times on a year-over-year basis for an average annual increase of 13.49%. 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. 1st Source's current payout ratio is 32%, meaning it paid out 32% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, SRCE expects solid earnings growth. The Zacks Consensus Estimate for 2020 is $3.62 per share, representing a year-over-year earnings growth rate of 1.40%.
Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. 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 have to be mindful of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, SRCE 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).