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 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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.
NorthWestern in Focus
NorthWestern (NWE) is headquartered in Sioux Falls, and is in the Utilities sector. The stock has seen a price change of -20.5% since the start of the year. The electric and gas utility is paying out a dividend of $0.6 per share at the moment, with a dividend yield of 4.21% compared to the Utility - Electric Power industry's yield of 3.41% and the S&P 500's yield of 2.63%.
Taking a look at the company's dividend growth, its current annualized dividend of $2.40 is up 4.3% 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 4.49%. 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. NorthWestern's current payout ratio is 60%, meaning it paid out 60% of its trailing 12-month EPS as dividend.
NWE is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2020 is $3.53 per share, representing a year-over-year earnings growth rate of 3.22%.
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.
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. 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 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).