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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.
3M in Focus
Based in St Paul, 3M (MMM) is in the Conglomerates sector, and so far this year, shares have seen a price change of 3.83%. The maker of Post-it notes, industrial coatings and ceramics is paying out a dividend of $1.48 per share at the moment, with a dividend yield of 3.26% compared to the Diversified Operations industry's yield of 0.31% and the S&P 500's yield of 1.41%.
Looking at dividend growth, the company's current annualized dividend of $5.92 is up 0.7% from last year. In the past five-year period, 3M has increased its dividend 5 times on a year-over-year basis for an average annual increase of 6.85%. 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, 3M's payout ratio is 58%, which means it paid out 58% of its trailing 12-month EPS as dividend.
MMM is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2021 is $10.11 per share, with earnings expected to increase 15.68% from the year ago period.
Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. But, not every company offers 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, MMM 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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