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 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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.
NorthWestern in Focus
Headquartered in Sioux Falls, NorthWestern (NWE) is a Utilities stock that has seen a price change of 21.87% so far this year. The electric and gas utility is paying out a dividend of $0.57 per share at the moment, with a dividend yield of 3.18% compared to the Utility – Electric Power industry’s yield of 2.92% and the S&P 500’s yield of 1.96%.
Taking a look at the company’s dividend growth, its current annualized dividend of $2.30 is up 4.5% 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 6.32%. 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. NorthWestern’s current payout ratio is 60%. This means it paid out 60% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, NWE expects solid earnings growth. The Zacks Consensus Estimate for 2019 is $3.42 per share, representing a year-over-year earnings growth rate of 0.88%.
Bottom Line
Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. It’s important to keep in mind that not all companies provide a quarterly payout.
For instance, it’s a rare occurrence when a tech start-up or big growth business offers their shareholders a dividend. It’s more common to see larger companies with more established profits give out dividends. 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 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).
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