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This is Why Pinnacle West (PNW) is a Great Dividend Stock

Zacks Equity Research
·3 min read

Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. 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 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.

Pinnacle West in Focus

Pinnacle West (PNW) is headquartered in Phoenix, and is in the Utilities sector. The stock has seen a price change of -8.17% since the start of the year. The power company is currently shelling out a dividend of $0.78 per share, with a dividend yield of 3.79%. This compares to the Utility - Electric Power industry's yield of 3.38% and the S&P 500's yield of 1.71%.

In terms of dividend growth, the company's current annualized dividend of $3.13 is up 4.5% from last year. In the past five-year period, Pinnacle West has increased its dividend 5 times on a year-over-year basis for an average annual increase of 5.80%. 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. Pinnacle West's current payout ratio is 59%, meaning it paid out 59% of its trailing 12-month EPS as dividend.

Looking at this fiscal year, PNW expects solid earnings growth. The Zacks Consensus Estimate for 2020 is $4.82 per share, which represents a year-over-year growth rate of 1.05%.

Bottom Line

Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. It's important to keep in mind that not all companies provide a quarterly payout.

High-growth firms or tech start-ups, for example, rarely provide their shareholders a dividend, while larger, more established companies that have more secure profits are often seen as the best dividend options. 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, PNW 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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