Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. But when you're an income investor, your primary focus is generating consistent cash flow from each of your liquid investments.
Cash flow can come from bond interest, interest from other types of investments, and of course, 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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.
Phillips 66 Partners LP in Focus
Phillips 66 Partners LP (PSXP) is headquartered in Houston, and is in the Oils-Energy sector. The stock has seen a price change of 16.72% since the start of the year. The company is currently shelling out a dividend of $0.83 per share, with a dividend yield of 6.8%. This compares to the Oil and Gas - Refining and Marketing - Master Limited Partnerships industry's yield of 10.54% and the S&P 500's yield of 1.97%.
Taking a look at the company's dividend growth, its current annualized dividend of $3.34 is up 13.8% from last year. Phillips 66 Partners LP has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 27.21%. 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. Phillips 66 Partners LP's current payout ratio is 80%, meaning it paid out 80% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, PSXP expects solid earnings growth. The Zacks Consensus Estimate for 2019 is $4.12 per share, with earnings expected to increase 3% 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. 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. That said, they can take comfort from the fact that PSXP is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).
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