Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. 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 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 tha t dividends account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.
Capital Southwest in Focus
Capital Southwest (CSWC) is headquartered in Dallas, and is in the Finance sector. The stock has seen a price change of 12.38% since the start of the year. Currently paying a dividend of $0.46 per share, the company has a dividend yield of 6.67%. In comparison, the Financial - Investment Management industry's yield is 3.17%, while the S&P 500's yield is 1.97%.
In terms of dividend growth, the company's current annualized dividend of $1.44 is up 45.5% from last year. In the past five-year period, Capital Southwest has increased its dividend 3 times on a year-over-year basis for an average annual increase of 69.20%. 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. Capital Southwest's current payout ratio is 115%, meaning it paid out 115% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for CSWC for this fiscal year. The Zacks Consensus Estimate for 2019 is $1.44 per share, with earnings expected to increase 42.57% 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. It's important to keep in mind that not all companies provide 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. That said, they can take comfort from the fact that CSWC is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).