All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. However, 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 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
NRG Energy (NRG) is headquartered in Princeton, and is in the Utilities sector. The stock has seen a price change of -16.91% since the start of the year. Currently paying a dividend of $0.3 per share, the company has a dividend yield of 3.63%. In comparison, the Utility - Electric Power industry's yield is 3.62%, while the S&P 500's yield is 1.89%.
Looking at dividend growth, the company's current annualized dividend of $1.20 is up 900% from last year. NRG Energy has increased its dividend 1 times on a year-over-year basis over the last 5 years for an average annual increase of 0.77%. 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 33%, which means it paid out 33% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, NRG expects solid earnings growth. The Zacks Consensus Estimate for 2020 is $5.18 per share, which represents a year-over-year growth rate of 30.81%.
Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. It's important to keep in mind that not all companies provide 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. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. 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).
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