All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. But 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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.
American Electric Power in Focus
Headquartered in Columbus, American Electric Power (AEP - Free Report) is a Utilities stock that has seen a price change of -3.63% so far this year. The utility is currently shelling out a dividend of $0.62 per share, with a dividend yield of 3.5%. This compares to the Utility - Electric Power industry's yield of 3.24% and the S&P 500's yield of 1.9%.
In terms of dividend growth, the company's current annualized dividend of $2.48 is up 3.8% from last year. Over the last 5 years, American Electric Power has increased its dividend 5 times on a year-over-year basis for an average annual increase of 5.31%. 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. AEP's current payout ratio is 63%, meaning it paid out 63% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for AEP for this fiscal year. The Zacks Consensus Estimate for 2018 is $3.92 per share, representing a year-over-year earnings growth rate of 6.52%.
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.
For instance, it's a rare occurrence when a tech start-up or big growth business offers their shareholders a dividend. It's more common to see larger companies with more established profits give out dividends. 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, AEP 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).