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.
Hormel Foods in Focus
Headquartered in Austin, Hormel Foods (HRL - Free Report) is a Consumer Staples stock that has seen a price change of 0.02% so far this year. The maker of Spam canned ham, Dinty Moore stew and other foods is paying out a dividend of $0.23 per share at the moment, with a dividend yield of 2.06% compared to the Food - Meat Products industry's yield of 0.31% and the S&P 500's yield of 2.79%.
Looking at dividend growth, the company's current annualized dividend of $0.93 is up 10.7% from last year. Hormel Foods has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 13.27%. 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. Hormel's current payout ratio is 53%. This means it paid out 53% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for HRL for this fiscal year. The Zacks Consensus Estimate for 2020 is $1.75 per share, representing a year-over-year earnings growth rate of 0.57%.
Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. However, not all companies offer a quarterly payout.
Big, established firms that have more secure profits are often seen as the best dividend options, but it's fairly uncommon to see high-growth businesses or tech start-ups offer their stockholders a dividend. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. With that in mind, HRL 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).