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.
Cash flow can come from bond interest, interest from other types of investments, and of course, 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.
American Water Works in Focus
American Water Works (AWK) is headquartered in Camden, and is in the Utilities sector. The stock has seen a price change of 14.52% since the start of the year. The water utility is paying out a dividend of $0.83 per share at the moment, with a dividend yield of 2.32% compared to the Utility - Water Supply industry's yield of 2.47% and the S&P 500's yield of 1.52%.
Taking a look at the company's dividend growth, its current annualized dividend of $3.31 is up 10.2% from last year. In the past five-year period, American Water Works has increased its dividend 5 times on a year-over-year basis for an average annual increase of 8.22%. 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. American Water Works's current payout ratio is 56%. This means it paid out 56% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, AWK expects solid earnings growth. The Zacks Consensus Estimate for 2025 is $5.72 per share, which represents a year-over-year growth rate of 6.12%.
Bottom Line
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.
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, AWK 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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American Water Works Company, Inc. (AWK): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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