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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.
Nasdaq in Focus
Headquartered in New York, Nasdaq (NDAQ - Free Report) is a Finance stock that has seen a price change of -17.25% so far this year. Currently paying a dividend of $0.47 per share, the company has a dividend yield of 2.12%. In comparison, the Securities and Exchanges industry's yield is 1.23%, while the S&P 500's yield is 2.51%.
Taking a look at the company's dividend growth, its current annualized dividend of $1.88 is up 1.6% from last year. Nasdaq has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 20.48%. 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. Nasdaq's current payout ratio is 38%. This means it paid out 38% of its trailing 12-month EPS as dividend.
NDAQ is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2020 is $5.48 per share, which represents a year-over-year growth rate of 9.60%.
From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. 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. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. With that in mind, NDAQ 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).