All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. 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.
First Merchants in Focus
Headquartered in Muncie, First Merchants (FRME) is a Finance stock that has seen a price change of -9.18% so far this year. The bank is paying out a dividend of $0.35 per share at the moment, with a dividend yield of 3.86% compared to the Banks - Midwest industry's yield of 3.44% and the S&P 500's yield of 1.69%.
Looking at dividend growth, the company's current annualized dividend of $1.40 is up 0.7% from last year. Over the last 5 years, First Merchants has increased its dividend 4 times on a year-over-year basis for an average annual increase of 7.52%. 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. First Merchants's current payout ratio is 40%, meaning it paid out 40% of its trailing 12-month EPS as dividend.
FRME is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2025 is $3.85 per share, representing a year-over-year earnings growth rate of 10.95%.
Bottom Line
From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. 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 must be conscious of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, FRME 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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First Merchants Corporation (FRME): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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