Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. However, when you're an income investor, your primary focus is generating consistent cash flow from each of your liquid investments.
Cash flow can come from bond interest, interest from other types of investments, and of course, 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 8.11% since the start of the year. The power company is paying out a dividend of $0.38 per share at the moment, with a dividend yield of 4.39% compared to the Utility - Electric Power industry's yield of 3.22% and the S&P 500's yield of 1.71%.
Looking at dividend growth, the company's current annualized dividend of $1.51 is up 7.9% from last year. Over the last 5 years, NRG Energy has increased its dividend 4 times on a year-over-year basis for an average annual increase of 96.41%. 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, NRG's payout ratio is 56%, which means it paid out 56% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for NRG for this fiscal year. The Zacks Consensus Estimate for 2023 is $4.59 per share, representing a year-over-year earnings growth rate of 75.19%.
Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. However, not all companies offer 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 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