All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. But for income investors, generating consistent cash flow from each of your liquid investments is your primary focus.
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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.
NRG Energy in Focus
Based in Houston, NRG Energy (NRG) is in the Utilities sector, and so far this year, shares have seen a price change of 9.43%. The power company is paying out a dividend of $0.38 per share at the moment, with a dividend yield of 4.34% compared to the Utility - Electric Power industry's yield of 3.18% and the S&P 500's yield of 1.76%.
Looking at dividend growth, the company's current annualized dividend of $1.51 is up 7.9% from last year. NRG Energy has increased its dividend 4 times on a year-over-year basis over the last 5 years for an average annual increase of 96.41%. 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. NRG's current payout ratio is 56%. This means it paid out 56% of its trailing 12-month EPS as dividend.
NRG is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2023 is $4.54 per share, which represents a year-over-year growth rate of 73.28%.
Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. It's important to keep in mind that not all companies provide a quarterly payout.
For instance, it's a rare occurrence when a tech start-up or big growth business offers their shareholders a dividend. It's more common to see larger companies with more established profits give out dividends. 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, NRG 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).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report