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.
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.
First Merchants in Focus
Headquartered in Muncie, First Merchants (FRME) is a Finance stock that has seen a price change of -4.61% so far this year. The bank is currently shelling out a dividend of $0.32 per share, with a dividend yield of 3.2%. This compares to the Banks - Midwest industry's yield of 2.79% and the S&P 500's yield of 1.68%.
In terms of dividend growth, the company's current annualized dividend of $1.28 is up 13.3% from last year. First Merchants has increased its dividend 4 times on a year-over-year basis over the last 5 years for an average annual increase of 11.27%. Future dividend growth will depend on earnings growth as well as payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Right now, First Merchants's payout ratio is 34%, which means it paid out 34% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, FRME expects solid earnings growth. The Zacks Consensus Estimate for 2022 is $4.07 per share, which represents a year-over-year growth rate of 6.82%.
Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. It's important to keep in mind that not all companies provide 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 FRME is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #2 (Buy).
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First Merchants Corporation (FRME) : Free Stock Analysis Report
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