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.
While cash flow can come from bond interest or interest from other types of investments, income investors hone in on 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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.
CMS Energy in Focus
Headquartered in Jackson, CMS Energy (CMS) is a Utilities stock that has seen a price change of -5.47% so far this year. Currently paying a dividend of $0.41 per share, the company has a dividend yield of 2.74%. In comparison, the Utility - Electric Power industry's yield is 3.53%, while the S&P 500's yield is 1.65%.
Taking a look at the company's dividend growth, its current annualized dividend of $1.63 is up 6.5% from last year. Over the last 5 years, CMS Energy has increased its dividend 5 times on a year-over-year basis for an average annual increase of 7.32%. 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. CMS Energy's current payout ratio is 59%, meaning it paid out 59% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for CMS for this fiscal year. The Zacks Consensus Estimate for 2020 is $2.66 per share, representing a year-over-year earnings growth rate of 6.83%.
From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. It's important to keep in mind that not all companies provide 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. With that in mind, CMS 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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