Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. But 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.
Eli Lilly in Focus
Eli Lilly (LLY - Free Report) is headquartered in Indianapolis, and is in the Medical sector. The stock has seen a price change of 8.96% since the start of the year. The drugmaker is currently shelling out a dividend of $0.74 per share, with a dividend yield of 2.07%. This compares to the Large Cap Pharmaceuticals industry's yield of 3.23% and the S&P 500's yield of 2.51%.
Taking a look at the company's dividend growth, its current annualized dividend of $2.96 is up 14.7% from last year. Over the last 5 years, Eli Lilly has increased its dividend 5 times on a year-over-year basis for an average annual increase of 6.02%. 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, Lilly's payout ratio is 43%, which means it paid out 43% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, LLY expects solid earnings growth. The Zacks Consensus Estimate for 2020 is $6.77 per share, with earnings expected to increase 12.09% from the year ago period.
Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. 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, LLY 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).