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 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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.
American Water Works in Focus
Based in Camden, American Water Works (AWK) is in the Utilities sector, and so far this year, shares have seen a price change of 13.95%. The water utility is paying out a dividend of $0.83 per share at the moment, with a dividend yield of 2.33% compared to the Utility - Water Supply industry's yield of 2.45% and the S&P 500's yield of 1.54%.
Taking a look at the company's dividend growth, its current annualized dividend of $3.31 is up 10.2% from last year. American Water Works has increased its dividend 5 times on a year-over-year basis over the last 5 years 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, representing a year-over-year earnings 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. But, not every company offers 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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