Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. But for income investors, generating consistent cash flow from each of your liquid investments is your primary focus.
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.
Eli Lilly in Focus
Headquartered in Indianapolis, Eli Lilly (LLY - Free Report) is a Medical stock that has seen a price change of 9.62% so far this year. The drugmaker is paying out a dividend of $0.74 per share at the moment, with a dividend yield of 2.05% compared to the Large Cap Pharmaceuticals industry's yield of 2.74% and the S&P 500's yield of 1.99%.
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 7.30%. 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. Lilly's current payout ratio is 46%, meaning it paid out 46% 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 $6.81 per share, representing a year-over-year earnings growth rate of 12.75%.
From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. 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. With that in mind, LLY presents a compelling investment opportunity; it's not only an attractive dividend play, but the stock also boasts a strong Zacks Rank of #1 (Strong Buy).