Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. However, when you're an income investor, your primary focus is generating consistent cash flow from each of your liquid investments.
While cash flow can come from bond interest or interest from other types of investments, income investors hone in on 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.
T. Rowe Price in Focus
Headquartered in Baltimore, T. Rowe Price (TROW - Free Report) is a Finance stock that has seen a price change of -19.94% so far this year. The financial services firm is paying out a dividend of $0.9 per share at the moment, with a dividend yield of 3.69% compared to the Financial - Investment Management industry's yield of 3.39% and the S&P 500's yield of 2.63%.
Taking a look at the company's dividend growth, its current annualized dividend of $3.60 is up 18.4% from last year. In the past five-year period, T. Rowe Price has increased its dividend 5 times on a year-over-year basis for an average annual increase of 10.30%. 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. Right now, T. Rowe's payout ratio is 38%, which means it paid out 38% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for TROW for this fiscal year. The Zacks Consensus Estimate for 2020 is $8.70 per share, which represents a year-over-year growth rate of 7.81%.
Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. 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. That said, they can take comfort from the fact that TROW is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).