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Why Union Pacific (UNP) 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 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.

Union Pacific in Focus

Headquartered in Omaha, Union Pacific (UNP - Free Report) is a Transportation stock that has seen a price change of 22.06% so far this year. The railroad is paying out a dividend of $0.88 per share at the moment, with a dividend yield of 2.09% compared to the Transportation - Rail industry's yield of 1.24% and the S&P 500's yield of 1.9%.

In terms of dividend growth, the company's current annualized dividend of $3.52 is up 15% from last year. Union Pacific has increased its dividend 4 times on a year-over-year basis over the last 5 years for an average annual increase of 11.97%. 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. Union Pacific's current payout ratio is 40%, meaning it paid out 40% of its trailing 12-month EPS as dividend.

Looking at this fiscal year, UNP expects solid earnings growth. The Zacks Consensus Estimate for 2019 is $9.03 per share, representing a year-over-year earnings growth rate of 14.16%.

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.

Big, established firms that have more secure profits are often seen as the best dividend options, but it's fairly uncommon to see high-growth businesses or tech start-ups offer their stockholders a dividend. Income investors have to be mindful of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, UNP 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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