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Are You Looking for a High-Growth Dividend Stock? Union Pacific (UNP) Could Be a Great Choice

Zacks Equity Research
Cadence Design Systems (CDNS) closed the most recent trading day at $67.72, moving -0.56% from the previous trading session.

Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. 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 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.

Union Pacific in Focus

Headquartered in Omaha, Union Pacific (UNP) is a Transportation stock that has seen a price change of 27.24% so far this year. Currently paying a dividend of $0.88 per share, the company has a dividend yield of 2%. In comparison, the Transportation - Rail industry's yield is 1.16%, while the S&P 500's yield is 1.87%.

Taking a look at the company's dividend growth, its current annualized dividend of $3.52 is up 15% from last year. Union Pacific has increased its dividend 4 times on a year-over-year basis over the last 5 years for an average annual increase of 11.97%. 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. Union Pacific's current payout ratio is 43%, meaning it paid out 43% of its trailing 12-month EPS as dividend.

Earnings growth looks solid for UNP for this fiscal year. The Zacks Consensus Estimate for 2019 is $9.06 per share, which represents a year-over-year growth rate of 14.54%.

Bottom Line

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. Income investors have to be mindful of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, UNP 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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