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Why First American Financial (FAF) is a Great Dividend Stock Right Now

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

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

First American Financial in Focus

Headquartered in Santa Ana, First American Financial (FAF - Free Report) is a Finance stock that has seen a price change of -3.68% so far this year. The financial services company is paying out a dividend of $0.53 per share at the moment, with a dividend yield of 3.42% compared to the Insurance - Property and Casualty industry's yield of 0.18% and the S&P 500's yield of 1.58%.

Looking at dividend growth, the company's current annualized dividend of $2.12 is up 1% from last year. First American Financial has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 5.56%. 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 American Financial's current payout ratio is 58%. This means it paid out 58% of its trailing 12-month EPS as dividend.

Earnings growth looks solid for FAF for this fiscal year. The Zacks Consensus Estimate for 2024 is $3.91 per share, representing a year-over-year earnings growth rate of 2.89%.

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.

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