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.
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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.
AES in Focus
Based in Arlington, AES (AES) is in the Utilities sector, and so far this year, shares have seen a price change of -41.91%. The power company is currently shelling out a dividend of $0.14 per share, with a dividend yield of 4.96%. This compares to the Utility - Electric Power industry's yield of 3.41% and the S&P 500's yield of 2.51%.
Taking a look at the company's dividend growth, its current annualized dividend of $0.57 is up 4.4% from last year. AES has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 7.89%. Future dividend growth will depend on earnings growth as well as payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. AES's current payout ratio is 40%, meaning it paid out 40% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for AES for this fiscal year. The Zacks Consensus Estimate for 2020 is $1.44 per share, which represents a year-over-year growth rate of 5.88%.
From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. But, not every company offers 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 have to be mindful of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, AES 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).