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.
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.
El Paso Electric in Focus
Headquartered in El Paso, El Paso Electric (EE - Free Report) is a Utilities stock that has seen a price change of 31.84% so far this year. The utility is currently shelling out a dividend of $0.38 per share, with a dividend yield of 2.33%. This compares to the Utility - Electric Power industry's yield of 2.93% and the S&P 500's yield of 1.87%.
Taking a look at the company's dividend growth, its current annualized dividend of $1.54 is up 8.8% from last year. El Paso Electric has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 6.69%. 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. El Paso Electric's current payout ratio is 59%, meaning it paid out 59% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for EE for this fiscal year. The Zacks Consensus Estimate for 2019 is $2.62 per share, with earnings expected to increase 12.45% from the year ago period.
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.
High-growth firms or tech start-ups, for example, rarely provide their shareholders a dividend, while larger, more established companies that have more secure profits are often seen as the best dividend options. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. With that in mind, EE 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).