Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. 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 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.
Norfolk Southern in Focus
Based in Norfolk, Norfolk Southern (NSC) is in the Transportation sector, and so far this year, shares have seen a price change of 13.65%. The railroad is currently shelling out a dividend of $0.86 per share, with a dividend yield of 2.02%. This compares to the Transportation - Rail industry's yield of 1.36% and the S&P 500's yield of 1.97%.
Looking at dividend growth, the company's current annualized dividend of $3.44 is up 13.2% from last year. Over the last 5 years, Norfolk Southern has increased its dividend 4 times on a year-over-year basis for an average annual increase of 6.76%. 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, Norfolk Southern's payout ratio is 34%, which means it paid out 34% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for NSC for this fiscal year. The Zacks Consensus Estimate for 2019 is $10.24 per share, with earnings expected to increase 7.68% 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 have to be mindful of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, NSC 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).