Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. 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.
Group 1 Automotive in Focus
Headquartered in Houston, Group 1 Automotive (GPI - Free Report) is a Retail-Wholesale stock that has seen a price change of -49.13% so far this year. The auto dealer is currently shelling out a dividend of $0.3 per share, with a dividend yield of 2.36%. This compares to the Automotive - Retail and Whole Sales industry's yield of 0.54% and the S&P 500's yield of 2.51%.
Looking at dividend growth, the company's current annualized dividend of $1.20 is up 10.1% from last year. Group 1 Automotive has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 7.06%. Looking ahead, future dividend growth will be dependent on earnings growth and payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Group 1 Automotive's current payout ratio is 11%, meaning it paid out 11% of its trailing 12-month EPS as dividend.
GPI is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2020 is $12.12 per share, with earnings expected to increase 10.89% from the year ago period.
From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. But, not every company offers 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. Income investors have to be mindful 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 GPI is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #2 (Buy).