All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. 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 that coveted distribution of a company's earnings paid out to shareholders, and investors often view it by its dividend yield, a metric that measures the 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.
Bank of America in Focus
Based in Charlotte, Bank of America (BAC) is in the Finance sector, and so far this year, shares have seen a price change of -2.7%. The nation's second-largest bank is paying out a dividend of $0.18 per share at the moment, with a dividend yield of 2.1% compared to the Banks - Major Regional industry's yield of 2.77% and the S&P 500's yield of 1.78%.
In terms of dividend growth, the company's current annualized dividend of $0.72 is up 9.1% from last year. Bank of America has increased its dividend 4 times on a year-over-year basis over the last 5 years for an average annual increase of 37.70%. 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. Bank of America's current payout ratio is 25%, meaning it paid out 25% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for BAC for this fiscal year. The Zacks Consensus Estimate for 2020 is $3.05 per share, with earnings expected to increase 10.91% 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.
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. With that in mind, BAC 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).