Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. However, 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.
AES in Focus
Headquartered in Arlington, AES (AES) is a Utilities stock that has seen a price change of -37.39% so far this year. The power company is currently shelling out a dividend of $0.14 per share, with a dividend yield of 4.6%. This compares to the Utility - Electric Power industry's yield of 3.25% and the S&P 500's yield of 2.28%.
Looking at dividend growth, the company's current annualized dividend of $0.57 is up 4.4% from last year. Over the last 5 years, AES has increased its dividend 5 times on a year-over-year basis for an average annual increase of 7.90%. 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%. This means it paid out 40% of its trailing 12-month EPS as dividend.
AES is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2020 is $1.42 per share, with earnings expected to increase 4.41% 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. But, not every company offers 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 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).