Penske Automotive (PAG) Could Be a Great Choice

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.

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

Penske Automotive in Focus

Based in Bloomfield Hills, Penske Automotive (PAG) is in the Retail-Wholesale sector, and so far this year, shares have seen a price change of 2.09%. The auto dealership chain is paying out a dividend of $1.22 per share at the moment, with a dividend yield of 3.14% compared to the Automotive - Retail and Whole Sales industry's yield of 0.24% and the S&P 500's yield of 1.62%.

In terms of dividend growth, the company's current annualized dividend of $4.88 is up 19.3% from last year. In the past five-year period, Penske Automotive has increased its dividend 5 times on a year-over-year basis for an average annual increase of 30.89%. Future dividend growth will depend on earnings growth as well as payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Penske's current payout ratio is 35%. This means it paid out 35% of its trailing 12-month EPS as dividend.

Looking at this fiscal year, PAG expects solid earnings growth. The Zacks Consensus Estimate for 2025 is $13.80 per share, with earnings expected to increase 0.44% from the year ago period.

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.

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 must be conscious of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, PAG 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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This article originally published on Zacks Investment Research (zacks.com).

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