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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.
Cash flow can come from bond interest, interest from other types of investments, and of course, 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.
Neenah Paper in Focus
Based in Alpharetta, Neenah Paper (NP) is in the Basic Materials sector, and so far this year, shares have seen a price change of -7.65%. The paper producer is paying out a dividend of $0.47 per share at the moment, with a dividend yield of 2.89% compared to the Paper and Related Products industry's yield of 1.33% and the S&P 500's yield of 1.78%.
Looking at dividend growth, the company's current annualized dividend of $1.88 is up 4.4% from last year. In the past five-year period, Neenah Paper has increased its dividend 5 times on a year-over-year basis for an average annual increase of 10.40%. Looking ahead, future dividend growth will be dependent on earnings growth and payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Right now, Neenah's payout ratio is 58%, which means it paid out 58% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, NP expects solid earnings growth. The Zacks Consensus Estimate for 2020 is $3.76 per share, representing a year-over-year earnings growth rate of 8.36%.
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 must be conscious of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, NP 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).