Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. But for income investors, generating consistent cash flow from each of your liquid investments is your primary focus.

Cash flow can come from bond interest, interest from other types of investments, and of course, 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.

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 6.58%. The water utility is paying out a dividend of $0.76 per share at the moment, with a dividend yield of 2.31% compared to the Utility - Water Supply industry's yield of 2.67% and the S&P 500's yield of 1.56%.

In terms of dividend growth, the company's current annualized dividend of $3.06 is up 1.9% from last year. Over the last 5 years, American Water Works has increased its dividend 5 times on a year-over-year basis for an average annual increase of 8.76%. 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 57%, meaning it paid out 57% 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 $5.71 per share, representing a year-over-year earnings growth rate of 5.94%.

Bottom Line

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.

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 have to be mindful of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. That said, they can take comfort from the fact that AWK is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #2 (Buy).

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American Water Works Company, Inc. (AWK) : Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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