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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. 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.
Union Pacific in Focus
Based in Omaha, Union Pacific (UNP) is in the Transportation sector, and so far this year, shares have seen a price change of 2.94%. The railroad is currently shelling out a dividend of $1.07 per share, with a dividend yield of 2%. This compares to the Transportation - Rail industry's yield of 1.02% and the S&P 500's yield of 1.38%.
Looking at dividend growth, the company's current annualized dividend of $4.28 is up 10.3% from last year. In the past five-year period, Union Pacific has increased its dividend 5 times on a year-over-year basis for an average annual increase of 14.93%. 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, Union Pacific's payout ratio is 48%, which means it paid out 48% of its trailing 12-month EPS as dividend.
UNP is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2021 is $9.74 per share, which represents a year-over-year growth rate of 18.93%.
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 must be conscious 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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Union Pacific Corporation (UNP) : Free Stock Analysis Report
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