All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. 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.
PSEG in Focus
Based in Newark, PSEG (PEG - Free Report) is in the Utilities sector, and so far this year, shares have seen a price change of 17.29%. Currently paying a dividend of $0.47 per share, the company has a dividend yield of 3.08%. In comparison, the Utility - Electric Power industry's yield is 2.84%, while the S&P 500's yield is 1.91%.
Looking at dividend growth, the company's current annualized dividend of $1.88 is up 4.4% from last year. In the past five-year period, PSEG has increased its dividend 5 times on a year-over-year basis for an average annual increase of 4.99%. 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. PSEG's current payout ratio is 58%. This means it paid out 58% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for PEG for this fiscal year. The Zacks Consensus Estimate for 2019 is $3.28 per share, representing a year-over-year earnings growth rate of 5.13%.
From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. 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. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. With that in mind, PEG is a compelling investment opportunity. Not only is it a strong dividend play, but the stock currently sits at a Zacks Rank of 3 (Hold).