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.
Penske Automotive in Focus
Based in Bloomfield Hills, Penske Automotive (PAG) is in the Retail-Wholesale sector, and so far this year, shares have seen a price change of 9.84%. Currently paying a dividend of $0.36 per share, the company has a dividend yield of 2.74%. In comparison, the Automotive – Retail and Whole Sales industry’s yield is 0.55%, while the S&P 500’s yield is 1.78%.
In terms of dividend growth, the company’s current annualized dividend of $1.44 is up 14.3% from last year. Over the last 5 years, Penske Automotive has increased its dividend 5 times on a year-over-year basis for an average annual increase of 17.59%. 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. Penske’s current payout ratio is 28%. This means it paid out 28% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for PAG for this fiscal year. The Zacks Consensus Estimate for 2018 is $5.35 per share, with earnings expected to increase 24.13% from the year ago period.
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.
Big, established firms that have more secure profits are often seen as the best dividend options, but it’s fairly uncommon to see high-growth businesses or tech start-ups offer their stockholders a dividend. 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, PAG 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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