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.
Norfolk Southern in Focus
Norfolk Southern (NSC) is headquartered in Norfolk, and is in the Transportation sector. The stock has seen a price change of 8.33% since the start of the year. Currently paying a dividend of $0.8 per share, the company has a dividend yield of 2.04%. In comparison, the Transportation - Rail industry's yield is 1.3%, while the S&P 500's yield is 1.97%.
Looking at dividend growth, the company's current annualized dividend of $3.20 is up 31.1% from last year. Norfolk Southern has increased its dividend 4 times on a year-over-year basis over the last 5 years for an average annual increase of 6.06%. 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. Norfolk Southern's current payout ratio is 37%, meaning it paid out 37% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for NSC for this fiscal year. The Zacks Consensus Estimate for 2018 is $9.16 per share, which represents a year-over-year growth rate of 38.58%.
Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. 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. 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 NSC is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).