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.
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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.
NorthWestern in Focus
Headquartered in Sioux Falls, NorthWestern (NWE - Free Report) is a Utilities stock that has seen a price change of 24.88% so far this year. The electric and gas utility is currently shelling out a dividend of $0.57 per share, with a dividend yield of 3.1%. This compares to the Utility - Electric Power industry's yield of 2.83% and the S&P 500's yield of 1.95%.
Taking a look at the company's dividend growth, its current annualized dividend of $2.30 is up 4.5% from last year. NorthWestern has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 6.32%. Looking ahead, future dividend growth will be dependent on earnings growth and payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Right now, NorthWestern's payout ratio is 60%, which means it paid out 60% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for NWE for this fiscal year. The Zacks Consensus Estimate for 2019 is $3.42 per share, which represents a year-over-year growth rate of 0.88%.
Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. 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. Income investors must be conscious of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, NWE 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).