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 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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.
First Defiance Financial in Focus
First Defiance Financial (FDEF) is headquartered in Defiance, and is in the Finance sector. The stock has seen a price change of -9.94% since the start of the year. The holding company for First Federal Bank of the Midwest is paying out a dividend of $0.22 per share at the moment, with a dividend yield of 3.1% compared to the Financial - Savings and Loan industry's yield of 2.4% and the S&P 500's yield of 1.78%.
Looking at dividend growth, the company's current annualized dividend of $0.88 is up 11.4% from last year. First Defiance Financial has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 19.36%. 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. Right now, First Defiance's payout ratio is 35%, which means it paid out 35% of its trailing 12-month EPS as dividend.
FDEF is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2020 is $2.56 per share, which represents a year-over-year growth rate of 1.19%.
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.
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. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. With that in mind, FDEF 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).