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 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.
Merck in Focus
Merck (MRK - Free Report) is headquartered in Kenilworth, and is in the Medical sector. The stock has seen a price change of -21.13% since the start of the year. Currently paying a dividend of $0.61 per share, the company has a dividend yield of 3.4%. In comparison, the Large Cap Pharmaceuticals industry's yield is 3.57%, while the S&P 500's yield is 2.41%.
Looking at dividend growth, the company's current annualized dividend of $2.44 is up 8% from last year. In the past five-year period, Merck has increased its dividend 5 times on a year-over-year basis for an average annual increase of 5.35%. 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, Merck's payout ratio is 47%, which means it paid out 47% of its trailing 12-month EPS as dividend.
MRK is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2020 is $5.72 per share, with earnings expected to increase 10.21% 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.
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, MRK 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).