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.
The Hartford in Focus
Headquartered in Hartford, The Hartford (HIG) is a Finance stock that has seen a price change of -11.16% so far this year. The insurance and financial services company is paying out a dividend of $0.25 per share at the moment, with a dividend yield of 2% compared to the Insurance - Multi line industry's yield of 2.03% and the S&P 500's yield of 1.79%.
Taking a look at the company's dividend growth, its current annualized dividend of $1 is up 6.4% from last year. The Hartford has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 12.44%. 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. The Hartford's current payout ratio is 26%, meaning it paid out 26% of its trailing 12-month EPS as dividend.
HIG is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2018 is $4.75 per share, representing a year-over-year earnings growth rate of 73.36%.
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 have to be mindful of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, HIG 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).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.