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Is Domtar (UFS) a Good Pick for Income Investors?

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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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.

Domtar in Focus

Based in Fort Mill, Domtar (UFS) is in the Basic Materials sector, and so far this year, shares have seen a price change of -3.37%. The paper and packaging maker is currently shelling out a dividend of $0.44 per share, with a dividend yield of 3.64%. This compares to the Paper and Related Products industry's yield of 1.61% and the S&P 500's yield of 1.78%.

In terms of dividend growth, the company's current annualized dividend of $1.74 is up 4.8% from last year. Over the last 5 years, Domtar has increased its dividend 4 times on a year-over-year basis for an average annual increase of 8.32%. Looking ahead, future dividend growth will be dependent on earnings growth and payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Right now, Domtar's payout ratio is 55%, which means it paid out 55% of its trailing 12-month EPS as dividend.

UFS is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2018 is $3.72 per share, representing a year-over-year earnings growth rate of 43.08%.

Bottom Line

Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. 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. That said, they can take comfort from the fact that UFS is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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