Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. However, when you're an income investor, your primary focus is generating consistent cash flow from each of your liquid investments.
Cash flow can come from bond interest, interest from other types of investments, and of course, 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.
Pinnacle West in Focus
Headquartered in Phoenix, Pinnacle West (PNW - Free Report) is a Utilities stock that has seen a price change of -21.16% so far this year. The power company is currently shelling out a dividend of $0.78 per share, with a dividend yield of 4.41%. This compares to the Utility - Electric Power industry's yield of 3.58% and the S&P 500's yield of 1.65%.
Looking at dividend growth, the company's current annualized dividend of $3.13 is up 4.5% from last year. In the past five-year period, Pinnacle West has increased its dividend 5 times on a year-over-year basis for an average annual increase of 5.80%. 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, Pinnacle West's payout ratio is 59%, which means it paid out 59% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for PNW for this fiscal year. The Zacks Consensus Estimate for 2020 is $4.82 per share, with earnings expected to increase 1.05% from the year ago period.
Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. However, not all companies offer 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, PNW 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).