Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. But 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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.
Scotts Miracle-Gro in Focus
Headquartered in Marysville, Scotts Miracle-Gro (SMG) is a Basic Materials stock that has seen a price change of 67.85% so far this year. The lawn and garden products company is paying out a dividend of $0.58 per share at the moment, with a dividend yield of 2.25% compared to the Fertilizers industry's yield of 1.26% and the S&P 500's yield of 1.82%.
In terms of dividend growth, the company's current annualized dividend of $2.32 is up 8.4% from last year. Over the last 5 years, Scotts Miracle-Gro has increased its dividend 5 times on a year-over-year basis for an average annual increase of 5.37%. 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. Scotts's current payout ratio is 52%, meaning it paid out 52% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, SMG expects solid earnings growth. The Zacks Consensus Estimate for 2019 is $5.02 per share, representing a year-over-year earnings growth rate of 12.30%.
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. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. With that in mind, SMG 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).
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