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Why Merck (MRK) is a Great Dividend Stock Right Now

Zacks Equity Research
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All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. 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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.

Merck in Focus

Headquartered in Kenilworth, Merck (MRK) is a Medical stock that has seen a price change of 3.02% so far this year. The pharmaceutical company is currently shelling out a dividend of $0.55 per share, with a dividend yield of 2.79%. This compares to the Large Cap Pharmaceuticals industry's yield of 2.98% and the S&P 500's yield of 1.97%.

In terms of dividend growth, the company's current annualized dividend of $2.20 is up 10.6% from last year. Merck has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 3.51%. 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, Merck's payout ratio is 49%, which means it paid out 49% of its trailing 12-month EPS as dividend.

Looking at this fiscal year, MRK expects solid earnings growth. The Zacks Consensus Estimate for 2019 is $4.72 per share, representing a year-over-year earnings growth rate of 8.76%.

Bottom Line

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.

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 have to be mindful of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, MRK presents a compelling investment opportunity; it's not only an attractive dividend play, but the stock also boasts a strong Zacks Rank of #2 (Buy).


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