All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. However, when you're an income investor, your primary focus is generating consistent cash flow from each of your liquid investments.
While cash flow can come from bond interest or interest from other types of investments, income investors hone in on 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.
MGE in Focus
Headquartered in Madison, MGE (MGEE - Free Report) is a Utilities stock that has seen a price change of -20.1% so far this year. The public utility holding company is currently shelling out a dividend of $0.37 per share, with a dividend yield of 2.35%. This compares to the Utility - Electric Power industry's yield of 3.58% and the S&P 500's yield of 1.65%.
Taking a look at the company's dividend growth, its current annualized dividend of $1.48 is up 7.2% from last year. In the past five-year period, MGE has increased its dividend 5 times on a year-over-year basis for an average annual increase of 4.42%. 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, MGE's payout ratio is 53%, which means it paid out 53% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, MGEE expects solid earnings growth. The Zacks Consensus Estimate for 2020 is $2.62 per share, representing a year-over-year earnings growth rate of 4.38%.
From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. 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. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. That said, they can take comfort from the fact that MGEE is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #2 (Buy).