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First American Financial (FAF) is a Top Dividend Stock Right Now: Should You Buy?

Zacks Equity Research

All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. But 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.

First American Financial in Focus

Based in Santa Ana, First American Financial (FAF) is in the Finance sector, and so far this year, shares have seen a price change of 32.32%. Currently paying a dividend of $0.42 per share, the company has a dividend yield of 2.84%. In comparison, the Insurance - Property and Casualty industry's yield is 1.03%, while the S&P 500's yield is 1.91%.

In terms of dividend growth, the company's current annualized dividend of $1.68 is up 5% from last year. First American Financial has increased its dividend 4 times on a year-over-year basis over the last 5 years for an average annual increase of 15.06%. Looking ahead, future dividend growth will be dependent on earnings growth and payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Right now, First American Financial's payout ratio is 34%, which means it paid out 34% of its trailing 12-month EPS as dividend.

FAF is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2019 is $5.02 per share, with earnings expected to increase 19.81% from the year ago period.

Bottom Line

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.

For instance, it's a rare occurrence when a tech start-up or big growth business offers their shareholders a dividend. It's more common to see larger companies with more established profits give out dividends. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. With that in mind, FAF presents a compelling investment opportunity; it's not only an attractive dividend play, but the stock also boasts a strong Zacks Rank of #1 (Strong Buy).


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