Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. 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.
AES in Focus
AES (AES - Free Report) is headquartered in Arlington, and is in the Utilities sector. The stock has seen a price change of -0.2% since the start of the year. The power company is paying out a dividend of $0.14 per share at the moment, with a dividend yield of 2.89% compared to the Utility - Electric Power industry's yield of 3.3% and the S&P 500's yield of 1.59%.
In terms of dividend growth, the company's current annualized dividend of $0.57 is up 4.4% from last year. In the past five-year period, AES has increased its dividend 5 times on a year-over-year basis for an average annual increase of 7.22%. Looking ahead, future dividend growth will be dependent on earnings growth and payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. AES's current payout ratio is 42%. This means it paid out 42% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for AES for this fiscal year. The Zacks Consensus Estimate for 2020 is $1.39 per share, representing a year-over-year earnings growth rate of 2.21%.
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. 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 AES is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #2 (Buy).