Why Union Pacific (UNP) is a Great Dividend Stock Right Now

All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. 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) is a Transportation stock that has seen a price change of -17.24% so far this year. The railroad is paying out a dividend of $1.3 per share at the moment, with a dividend yield of 2.49% compared to the Transportation - Rail industry's yield of 0.87% and the S&P 500's yield of 1.68%.

Looking at dividend growth, the company's current annualized dividend of $5.20 is up 21.2% from last year. In the past five-year period, Union Pacific has increased its dividend 4 times on a year-over-year basis for an average annual increase of 13.86%. 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 45%. This means it paid out 45% of its trailing 12-month EPS as dividend.

Earnings growth looks solid for UNP for this fiscal year. The Zacks Consensus Estimate for 2022 is $11.61 per share, representing a year-over-year earnings growth rate of 16.68%.

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. However, not all companies offer 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. Income investors must be conscious 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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