Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. 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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.
Morgan Stanley in Focus
Headquartered in New York, Morgan Stanley (MS) is a Finance stock that has seen a price change of 10.41% so far this year. The investment bank is currently shelling out a dividend of $0.35 per share, with a dividend yield of 2.48%. This compares to the Financial - Investment Bank industry's yield of 0.76% and the S&P 500's yield of 1.74%.
In terms of dividend growth, the company's current annualized dividend of $1.40 is up 7.7% from last year. Over the last 5 years, Morgan Stanley has increased its dividend 5 times on a year-over-year basis for an average annual increase of 25.32%. 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. Morgan Stanley's current payout ratio is 31%, meaning it paid out 31% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for MS for this fiscal year. The Zacks Consensus Estimate for 2020 is $5.17 per share, representing a year-over-year earnings growth rate of 3.82%.
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. With that in mind, MS 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).