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Why Southwest Gas (SWX) is a Great Dividend Stock

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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 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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.

Southwest Gas in Focus

Based in Las Vegas, Southwest Gas (SWX - Free Report) is in the Utilities sector, and so far this year, shares have seen a price change of -0.67%. Currently paying a dividend of $0.52 per share, the company has a dividend yield of 2.6%. In comparison, the Utility - Gas Distribution industry's yield is 2.74%, while the S&P 500's yield is 1.78%.

Looking at dividend growth, the company's current annualized dividend of $2.08 is up 7.5% from last year. Over the last 5 years, Southwest Gas has increased its dividend 5 times on a year-over-year basis for an average annual increase of 10.47%. 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. Southwest Gas's current payout ratio is 54%. This means it paid out 54% of its trailing 12-month EPS as dividend.

SWX is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2018 is $3.71 per share, representing a year-over-year earnings growth rate of 2.49%.

Bottom Line

Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. It's important to keep in mind that not all companies provide 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. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. With that in mind, SWX presents a compelling investment opportunity; it's not only an attractive dividend play, but the stock also boasts a strong Zacks Rank of #2 (Buy).


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