All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. But for income investors, generating consistent cash flow from each of your liquid investments is your primary focus.
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.
Merck in Focus
Headquartered in Kenilworth, Merck (MRK - Free Report) is a Medical stock that has seen a price change of -9.82% so far this year. The pharmaceutical company is currently shelling out a dividend of $0.61 per share, with a dividend yield of 2.97%. This compares to the Large Cap Pharmaceuticals industry's yield of 2.98% and the S&P 500's yield of 2.18%.
In terms of dividend growth, the company's current annualized dividend of $2.44 is up 8% from last year. In the past five-year period, Merck has increased its dividend 5 times on a year-over-year basis for an average annual increase of 5.35%. Future dividend growth will depend on earnings growth as well as payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Right now, Merck's payout ratio is 47%, which means it paid out 47% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, MRK expects solid earnings growth. The Zacks Consensus Estimate for 2020 is $5.72 per share, representing a year-over-year earnings growth rate of 10.21%.
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.
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, MRK 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).