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.
While cash flow can come from bond interest or interest from other types of investments, income investors hone in on 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.
Based in Santa Ana, First American Financial (FAF) is in the Finance sector, and so far this year, shares have seen a price change of 5.2%. Currently paying a dividend of $0.54 per share, the company has a dividend yield of 3.29%. In comparison, the Insurance - Property and Casualty industry's yield is 0.52%, while the S&P 500's yield is 1.56%.
Taking a look at the company's dividend growth, its current annualized dividend of $2.16 is up 0.9% from last year. In the past five-year period, First American Financial has increased its dividend 5 times on a year-over-year basis for an average annual increase of 4.66%. 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. First American Financial's current payout ratio is 49%. This means it paid out 49% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for FAF for this fiscal year. The Zacks Consensus Estimate for 2025 is $5.35 per share, which represents a year-over-year growth rate of 21.59%.
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, FAF 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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This article originally published on Zacks Investment Research (zacks.com).
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