All investors aim for big returns on their portfolios, be it through stocks, bonds, ETFs, or other securities. However, for income investors, generating consistent cash flow from their investments is paramount. Dividends, a portion of a company’s earnings distributed to shareholders, are a primary source of this cash flow. Dividend yield, calculated as a percentage of the dividend against the current stock price, is a key metric for income investors.
Numerous studies highlight the significant contribution of dividends to long-term returns. In many instances, dividends account for over one-third of total returns. State Street Corporation (STT), headquartered in Boston, is a financial stock that offers an attractive dividend yield of 3.23%. This compares favorably to the Banks – Major Regional industry average of 3.32% and the S&P 500’s yield of 1.56%.
State Street currently pays out a dividend of $0.69 per share, with its annualized dividend of $2.76 representing a 4.5% increase from last year. Over the past five years, the company has increased its dividend four times annually, averaging a 7.56% annual growth rate. Future dividend growth will depend on earnings growth and the payout ratio, which signifies the proportion of earnings per share paid out as dividends. State Street’s current payout ratio stands at 35%, implying that 35% of its trailing 12-month earnings per share (EPS) are distributed as dividends.
Looking ahead, State Street anticipates strong earnings growth. The Zacks Consensus Estimate for 2024 projects an EPS of $8.13, signifying a 6.14% year-over-year growth rate. This growth outlook bodes well for future dividend increases.
Dividends are highly valued by investors due to their numerous benefits. They boost stock investing profits, mitigate overall portfolio risk, and offer tax advantages. However, not all companies offer quarterly dividends. Tech start-ups and high-growth businesses rarely distribute dividends, while established companies with consistent profits are more likely to do so.
Income investors should be aware that high-yielding stocks can struggle during periods of rising interest rates. However, State Street’s attractive dividend yield combined with its strong earnings growth prospects and Zacks Rank of #2 (Buy) make it a compelling investment opportunity for income investors.
