All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. 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 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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.
NRG Energy in Focus
NRG Energy (NRG) is headquartered in Houston, and is in the Utilities sector. The stock has seen a price change of 4.31% since the start of the year. The power company is currently shelling out a dividend of $0.38 per share, with a dividend yield of 4.55%. This compares to the Utility - Electric Power industry's yield of 3.21% and the S&P 500's yield of 1.74%.
Taking a look at the company's dividend growth, its current annualized dividend of $1.51 is up 7.9% from last year. NRG Energy has increased its dividend 3 times on a year-over-year basis over the last 5 years for an average annual increase of 101.82%. 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. 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%.
From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. However, not all companies offer a quarterly payout.
Big, established firms that have more secure profits are often seen as the best dividend options, but it's fairly uncommon to see high-growth businesses or tech start-ups offer their stockholders a dividend. Income investors have to be mindful 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