Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. 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 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.
Pinnacle West in Focus
Based in Phoenix, Pinnacle West (PNW - Free Report) is in the Utilities sector, and so far this year, shares have seen a price change of -10.06%. The power company is paying out a dividend of $0.78 per share at the moment, with a dividend yield of 3.87% compared to the Utility - Electric Power industry's yield of 3.3% and the S&P 500's yield of 1.59%.
Looking at dividend growth, the company's current annualized dividend of $3.13 is up 4.5% from last year. Over the last 5 years, Pinnacle West has increased its dividend 5 times on a year-over-year basis for an average annual increase of 5.62%. 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, representing a year-over-year earnings growth rate of 1.05%.
From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. It's important to keep in mind that not all companies provide 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, 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).