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.
Cash flow can come from bond interest, interest from other types of investments, and of course, 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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.
MGE in Focus
Headquartered in Madison, MGE (MGEE) is a Utilities stock that has seen a price change of 12.17% so far this year. The public utility holding company is currently shelling out a dividend of $0.41 per share, with a dividend yield of 2.06%. This compares to the Utility - Electric Power industry's yield of 3.42% and the S&P 500's yield of 1.68%.
Taking a look at the company's dividend growth, its current annualized dividend of $1.63 is up 2.5% from last year. In the past five-year period, MGE has increased its dividend 5 times on a year-over-year basis for an average annual increase of 4.83%. 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. MGE's current payout ratio is 55%, meaning it paid out 55% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for MGEE for this fiscal year. The Zacks Consensus Estimate for 2023 is $3.37 per share, with earnings expected to increase 9.77% 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. 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, MGEE 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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