Why Bank of America (BAC) is a Top Dividend Stock for Your Portfolio

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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.

Bank of America in Focus

Bank of America (BAC) is headquartered in Charlotte, and is in the Finance sector. The stock has seen a price change of -44.15% since the start of the year. The nation's second-largest bank is currently shelling out a dividend of $0.18 per share, with a dividend yield of 3.66%. This compares to the Banks - Major Regional industry's yield of 4% and the S&P 500's yield of 2.79%.

Taking a look at the company's dividend growth, its 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%. 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. Bank of America's current payout ratio is 25%. This means 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 $2.92 per share, representing a year-over-year earnings growth rate of 6.18%.

Bottom Line

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. Income investors must be conscious of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, BAC is a compelling investment opportunity. Not only is it a strong dividend play, but the stock currently sits at a Zacks Rank of 3 (Hold).

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