Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. 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 that coveted distribution of a company's earnings paid out to shareholders, and investors often view it by its dividend yield, a metric that measures the 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.

First Merchants in Focus

First Merchants (FRME) is headquartered in Muncie, and is in the Finance sector. The stock has seen a price change of -10.63% 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 3.93% compared to the Banks - Midwest industry's yield of 3.26% and the S&P 500's yield of 1.73%.

In terms of dividend growth, the company's current annualized dividend of $1.40 is up 0.7% from last year. In the past five-year period, First Merchants has increased its dividend 4 times on a year-over-year basis for an average annual increase of 7.79%. 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. First Merchants's current payout ratio is 40%, meaning it paid out 40% of its trailing 12-month EPS as dividend.

FRME is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2025 is $3.85 per share, representing a year-over-year earnings growth rate of 10.95%.

Bottom Line

From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. It's important to keep in mind that not all companies provide 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, FRME 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).

Story Continues

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This article originally published on Zacks Investment Research (zacks.com).

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