All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. 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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.
American Water Works in Focus
American Water Works (AWK) is headquartered in Camden, and is in the Utilities sector. The stock has seen a price change of -2.83% since the start of the year. The water utility is currently shelling out a dividend of $0.76 per share, with a dividend yield of 2.39%. This compares to the Utility - Water Supply industry's yield of 2.33% and the S&P 500's yield of 1.58%.
In terms of dividend growth, the company's current annualized dividend of $3.06 is up 10.2% from last year. American Water Works has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 8.72%. Looking ahead, future dividend growth will be dependent on earnings growth and payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Right now, American Water Works's payout ratio is 57%, which means it paid out 57% of its trailing 12-month EPS as dividend.
AWK is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2024 is $5.24 per share, with earnings expected to increase 6.94% from the year ago period.
Bottom Line
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.
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. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. With that in mind, AWK 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
