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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.

Union Pacific in Focus

Based in Omaha, Union Pacific (UNP) is in the Transportation sector, and so far this year, shares have seen a price change of 20.69%. Currently paying a dividend of $0.88 per share, the company has a dividend yield of 2.11%. In comparison, the Transportation - Rail industry's yield is 1.34%, while the S&P 500's yield is 1.96%.

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 5 times on a year-over-year basis over the last 5 years for an average annual increase of 11.20%. 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, Union Pacific's payout ratio is 40%, which means 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 $9.05 per share, representing a year-over-year earnings growth rate of 14.41%.

Bottom Line

Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. But, not every company offers 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 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 UNP is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #2 (Buy).

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