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This is Why Merck (MRK) is a Great Dividend Stock

Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. But for income investors, generating consistent cash flow from each of your liquid investments is your primary focus.

Cash flow can come from bond interest, interest from other types of investments, and of course, 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.

Merck in Focus

Based in Kenilworth, Merck (MRK) is in the Medical sector, and so far this year, shares have seen a price change of -9.47%. The pharmaceutical company is currently shelling out a dividend of $0.61 per share, with a dividend yield of 2.96%. This compares to the Large Cap Pharmaceuticals industry's yield of 2.53% and the S&P 500's yield of 1.76%.

Looking at dividend growth, the company's current annualized dividend of $2.44 is up 8% from last year. In the past five-year period, Merck has increased its dividend 5 times on a year-over-year basis for an average annual increase of 5.35%. 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. Right now, Merck's payout ratio is 47%, which means it paid out 47% of its trailing 12-month EPS as dividend.

Looking at this fiscal year, MRK expects solid earnings growth. The Zacks Consensus Estimate for 2020 is $5.72 per share, representing a year-over-year earnings growth rate of 10.21%.

Bottom Line

Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. 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, MRK 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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