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Why First Merchants (FRME) is a Top Dividend Stock for Your Portfolio

Zacks Equity Research
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Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. But for income investors, generating consistent cash flow from each of your liquid investments is your primary focus.

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.

First Merchants in Focus

Based in Muncie, First Merchants (FRME) is in the Finance sector, and so far this year, shares have seen a price change of 14.04%. The bank is paying out a dividend of $0.22 per share at the moment, with a dividend yield of 2.25% compared to the Banks - Midwest industry's yield of 2.26% and the S&P 500's yield of 1.97%.

Looking at dividend growth, the company's current annualized dividend of $0.88 is up 4.8% from last year. Over the last 5 years, First Merchants has increased its dividend 5 times on a year-over-year basis for an average annual increase of 31.22%. 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. First Merchants's current payout ratio is 27%, meaning it paid out 27% of its trailing 12-month EPS as dividend.

FRME is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2019 is $3.44 per share, representing a year-over-year earnings growth rate of 6.83%.

Bottom Line

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.

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. 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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