Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. But for income investors, generating consistent cash flow from each of your liquid investments is your primary focus.

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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.

Principal Financial in Focus

Headquartered in Des Moines, Principal Financial (PFG) is a Finance stock that has seen a price change of 30.76% so far this year. Currently paying a dividend of $0.63 per share, the company has a dividend yield of 3.88%. In comparison, the Financial - Investment Management industry's yield is 1.55%, while the S&P 500's yield is 1.4%.

Looking at dividend growth, the company's current annualized dividend of $2.52 is up 12.5% from last year. In the past five-year period, Principal Financial has increased its dividend 5 times on a year-over-year basis for an average annual increase of 6.80%. Any future dividend growth will depend on both earnings growth and the company's payout ratio; a payout ratio is the proportion of a firm's annual earnings per share that it pays out as a dividend. Principal Financial's current payout ratio is 44%, meaning it paid out 44% of its trailing 12-month EPS as dividend.

PFG is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2021 is $6.49 per share, which represents a year-over-year growth rate of 31.38%.

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.

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. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. With that in mind, PFG 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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