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Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. 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.
Emerson Electric in Focus
Headquartered in St. Louis, Emerson Electric (EMR) is an Industrial Products stock that has seen a price change of -16.33% so far this year. The maker of process controls systems, valves and analytical instruments is currently shelling out a dividend of $0.51 per share, with a dividend yield of 2.65%. This compares to the Manufacturing - Electronics industry's yield of 0.54% and the S&P 500's yield of 1.73%.
Looking at dividend growth, the company's current annualized dividend of $2.06 is up 2% from last year. In the past five-year period, Emerson Electric has increased its dividend 5 times on a year-over-year basis for an average annual increase of 1.45%. 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. Right now, Emerson Electric's payout ratio is 44%, which means it paid out 44% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for EMR for this fiscal year. The Zacks Consensus Estimate for 2022 is $5.06 per share, which represents a year-over-year growth rate of 23.41%.
Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. 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. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. With that in mind, EMR 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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