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 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.
AES in Focus
Based in Arlington, AES (AES - Free Report) is in the Utilities sector, and so far this year, shares have seen a price change of 11.48%. The power company is paying out a dividend of $0.14 per share at the moment, with a dividend yield of 3.39% compared to the Utility - Electric Power industry's yield of 2.97% and the S&P 500's yield of 1.95%.
Taking a look at the company's dividend growth, its current annualized dividend of $0.55 is up 5.8% from last year. Over the last 5 years, AES has increased its dividend 5 times on a year-over-year basis for an average annual increase of 19.62%. Future dividend growth will depend on earnings growth as well as 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%, meaning 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 2019 is $1.34 per share, with earnings expected to increase 8.06% from the year ago period.
Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. However, not all companies offer 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. 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).