All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. But 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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.
Timken in Focus
Headquartered in North Canton, Timken (TKR) is an Industrial Products stock that has seen a price change of 4.7% so far this year. The maker of bearings and power transmissions is paying out a dividend of $2.34 per share at the moment, with a dividend yield of 32% compared to the Metal Products - Procurement and Fabrication industry's yield of 58.56% and the S&P 500's yield of 0.28%.
Taking a look at the company's dividend growth, its current annualized dividend of $2.47 is up 3.1% from last year. Over the last 5 years, Timken has increased its dividend 3.70 times on a year-over-year basis for an average annual increase of 4%. 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. Timken's current payout ratio is -2.54%, meaning it paid out -2.54% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, TKR expects solid earnings growth. The Zacks Consensus Estimate for 2018 is $1.12 per share, with earnings expected to increase 4.65% 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. But, not every company offers 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. Income investors must be conscious of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, TKR presents a compelling investment opportunity; it's not only an attractive dividend play, but the stock also boasts a strong Zacks Rank of #2 (Buy).
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