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.
Cash flow can come from bond interest, interest from other types of investments, and of course, 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.
TowneBank in Focus
Based in Portsmouth, TowneBank (TOWN) is in the Finance sector, and so far this year, shares have seen a price change of -0.43%. The community bank is paying out a dividend of $0.18 per share at the moment, with a dividend yield of 2.6% compared to the Banks - Southeast industry's yield of 1.84% and the S&P 500's yield of 1.75%.
Taking a look at the company's dividend growth, its current annualized dividend of $0.72 is up 2.9% from last year. Over the last 5 years, TowneBank has increased its dividend 5 times on a year-over-year basis for an average annual increase of 10.48%. 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. TowneBank's current payout ratio is 37%. This means it paid out 37% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, TOWN expects solid earnings growth. The Zacks Consensus Estimate for 2020 is $1.97 per share, representing a year-over-year earnings growth rate of 2.07%.
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. Income investors have to be mindful of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. That said, they can take comfort from the fact that TOWN is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #1 (Strong Buy).