Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. However, 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.
NorthWestern in Focus
NorthWestern (NWE) is headquartered in Sioux Falls, and is in the Utilities sector. The stock has seen a price change of -22.27% since the start of the year. Currently paying a dividend of $0.6 per share, the company has a dividend yield of 4.31%. In comparison, the Utility - Electric Power industry's yield is 3.39%, while the S&P 500's yield is 2.53%.
Taking a look at the company's dividend growth, its current annualized dividend of $2.40 is up 4.3% from last year. Over the last 5 years, NorthWestern has increased its dividend 4 times on a year-over-year basis for an average annual increase of 4.49%. 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, NorthWestern's payout ratio is 60%, which means 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, which represents a year-over-year 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.
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. That said, they can take comfort from the fact that NWE is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #1 (Strong Buy).