Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. 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 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.
Essential Utilities in Focus
Headquartered in Bryn Mawr, Essential Utilities (WTRG - Free Report) is a Utilities stock that has seen a price change of -7.12% so far this year. Currently paying a dividend of $0.23 per share, the company has a dividend yield of 2.15%. In comparison, the Utility - Water Supply industry's yield is 1.87%, while the S&P 500's yield is 1.93%.
Taking a look at the company's dividend growth, its current annualized dividend of $0.94 is up 3.6% from last year. In the past five-year period, Essential Utilities has increased its dividend 5 times on a year-over-year basis for an average annual increase of 7.21%. 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. Essential Utilities's current payout ratio is 52%, meaning it paid out 52% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, WTRG expects solid earnings growth. The Zacks Consensus Estimate for 2020 is $1.56 per share, representing a year-over-year earnings growth rate of 6.12%.
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. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. With that in mind, WTRG 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).