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.
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.
First Merchants (FRME) is headquartered in Muncie, and is in the Finance sector. The stock has seen a price change of 6.54% since the start of the year. The bank is paying out a dividend of $0.35 per share at the moment, with a dividend yield of 3.29% compared to the Banks - Midwest industry's yield of 2.99% and the S&P 500's yield of 1.57%.
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 7.79%. 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, First Merchants's payout ratio is 40%, which means it paid out 40% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, FRME expects solid earnings growth. The Zacks Consensus Estimate for 2025 is $3.79 per share, representing a year-over-year earnings growth rate of 9.22%.
Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. 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. That said, they can take comfort from the fact that FRME is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #1 (Strong Buy).
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This article originally published on Zacks Investment Research (zacks.com).
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