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 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.
East West Bancorp in Focus
Based in Pasadena, East West Bancorp (EWBC) is in the Finance sector, and so far this year, shares have seen a price change of -2.12%. The bank holding company is currently shelling out a dividend of $0.28 per share, with a dividend yield of 2.31%. This compares to the Banks - West industry's yield of 2% and the S&P 500's yield of 1.78%.
Taking a look at the company's dividend growth, its current annualized dividend of $1.10 is up 4.3% from last year. In the past five-year period, East West Bancorp has increased its dividend 3 times on a year-over-year basis for an average annual increase of 6.47%. 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. East West Bancorp's current payout ratio is 23%. This means it paid out 23% of its trailing 12-month EPS as dividend.
EWBC is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2020 is $4.74 per share, representing a year-over-year earnings growth rate of 2.82%.
Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. It's important to keep in mind that not all companies provide a quarterly payout.
Big, established firms that have more secure profits are often seen as the best dividend options, but it's fairly uncommon to see high-growth businesses or tech start-ups offer their stockholders a dividend. 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 EWBC is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #2 (Buy).