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 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.
Ingersoll-Rand in Focus
Headquartered in Dublin, Ingersoll-Rand (IR) is an Industrial Products stock that has seen a price change of 8.91% so far this year. The manufacturer is currently shelling out a dividend of $0.53 per share, with a dividend yield of 2.18%. This compares to the Manufacturing - General Industrial industry's yield of 0.53% and the S&P 500's yield of 1.9%.
In terms of dividend growth, the company's current annualized dividend of $2.12 is up 24.7% from last year. Ingersoll-Rand has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 18.90%. 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. Ingersoll-Rand's current payout ratio is 36%. This means it paid out 36% of its trailing 12-month EPS as dividend.
IR is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2018 is $5.54 per share, with earnings expected to increase 22.84% 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. 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. Income investors must be conscious of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. That said, they can take comfort from the fact that IR is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).