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.
Allete in Focus
Based in Duluth, Allete (ALE) is in the Utilities sector, and so far this year, shares have seen a price change of 2.27%. Currently paying a dividend of $0.56 per share, the company has a dividend yield of 2.95%. In comparison, the Utility - Electric Power industry's yield is 3.22%, while the S&P 500's yield is 1.96%.
Looking at dividend growth, the company's current annualized dividend of $2.24 is up 4.7% from last year. In the past five-year period, Allete has increased its dividend 5 times on a year-over-year basis for an average annual increase of 3.26%. 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, Allete's payout ratio is 69%, which means it paid out 69% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, ALE expects solid earnings growth. The Zacks Consensus Estimate for 2018 is $3.35 per share, with earnings expected to increase 5.02% from the year ago period.
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.
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, ALE presents a compelling investment opportunity; it's not only an attractive dividend play, but the stock also boasts a strong Zacks Rank of #2 (Buy).