Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. But 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.
Southwest Gas in Focus
Headquartered in Las Vegas, Southwest Gas (SWX - Free Report) is a Utilities stock that has seen a price change of 17.19% so far this year. The natural gas company is currently shelling out a dividend of $0.55 per share, with a dividend yield of 2.43%. This compares to the Utility - Gas Distribution industry's yield of 2.71% and the S&P 500's yield of 1.85%.
In terms of dividend growth, the company's current annualized dividend of $2.18 is up 6.1% from last year. Southwest Gas has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 9.09%. 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. Right now, Southwest Gas's payout ratio is 54%, which means it paid out 54% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, SWX expects solid earnings growth. The Zacks Consensus Estimate for 2019 is $3.93 per share, representing a year-over-year earnings growth rate of 6.79%.
Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. 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).