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Why First American Financial (FAF) is a Top Dividend Stock for Your Portfolio

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 American Financial in Focus

Based in Santa Ana, First American Financial (FAF) is in the Finance sector, and so far this year, shares have seen a price change of 22.87%. The financial services company is paying out a dividend of $0.42 per share at the moment, with a dividend yield of 3.06% compared to the Insurance - Property and Casualty industry's yield of 1.53% and the S&P 500's yield of 1.97%.

Looking at dividend growth, the company's current annualized dividend of $1.68 is up 5% from last year. In the past five-year period, First American Financial has increased its dividend 5 times on a year-over-year basis for an average annual increase of 15.33%. 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. First American Financial's current payout ratio is 36%, meaning it paid out 36% of its trailing 12-month EPS as dividend.

Looking at this fiscal year, FAF expects solid earnings growth. The Zacks Consensus Estimate for 2019 is $4.70 per share, with earnings expected to increase 12.17% from the year ago period.

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. But, not every company offers a quarterly payout.

For instance, it's a rare occurrence when a tech start-up or big growth business offers their shareholders a dividend. It's more common to see larger companies with more established profits give out dividends. 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 FAF is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).


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