Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. But for income investors, generating consistent cash flow from each of your liquid investments is your primary focus.
While cash flow can come from bond interest or interest from other types of investments, income investors hone in on 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 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 -20.29% so far this year. The auto dealership chain is paying out a dividend of $0.42 per share at the moment, with a dividend yield of 4.2% compared to the Automotive - Retail and Whole Sales industry's yield of 0.54% and the S&P 500's yield of 2.31%.
Taking a look at the company's dividend growth, its current annualized dividend of $1.68 is up 6.3% 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%. 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. Penske's current payout ratio is 31%, meaning it paid out 31% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for PAG for this fiscal year. The Zacks Consensus Estimate for 2020 is $5.64 per share, representing a year-over-year earnings growth rate of 6.82%.
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.
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. 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, 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).