Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. 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 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.
AES in Focus
Headquartered in Arlington, AES (AES) is a Utilities stock that has seen a price change of 36.84% so far this year. The power company is currently shelling out a dividend of $0.13 per share, with a dividend yield of 3.51%. This compares to the Utility - Electric Power industry's yield of 3.24% and the S&P 500's yield of 1.83%.
Taking a look at the company's dividend growth, its current annualized dividend of $0.52 is up 8.3% from last year. In the past five-year period, AES has increased its dividend 5 times on a year-over-year basis for an average annual increase of 26.31%. Future dividend growth will depend on earnings growth as well as payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Right now, AES's payout ratio is 43%, which means it paid out 43% of its trailing 12-month EPS as dividend.
AES is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2018 is $1.21 per share, with earnings expected to increase 12.04% from the year ago period.
Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. 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. That said, they can take comfort from the fact that AES is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #2 (Buy).
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