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.
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.
Essential Utilities in Focus
Headquartered in Bryn Mawr, Essential Utilities (WTRG - Free Report) is a Utilities stock that has seen a price change of -11.65% so far this year. The water utility is paying out a dividend of $0.25 per share at the moment, with a dividend yield of 2.42% compared to the Utility - Water Supply industry's yield of 1.78% and the S&P 500's yield of 1.59%.
Taking a look at the company's dividend growth, its current annualized dividend of $1 is up 10.3% from last year. Essential Utilities has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 7.12%. 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. Essential Utilities's current payout ratio is 55%. This means it paid out 55% of its trailing 12-month EPS as dividend.
WTRG is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2020 is $1.57 per share, which represents a year-over-year growth rate of 6.80%.
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.
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 have to be mindful of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. That said, they can take comfort from the fact that WTRG is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #2 (Buy).