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Southwest Is Bringing Its Dividend Back: What Investors Should Know

Just as Southwest Airlines (LUV -4.71%) kicks off its 2022 Investor Day on Wednesday, the company released some good news for shareholders: It is reinstating its dividend after suspending it in early 2020, when COVID-19 related lockdowns slammed the travel industry.

The return of Southwest’s dividend signals strength in the travel industry and in the company’s underlying business. The company expects fourth-quarter operating revenue to surge 13% to 17% year over year. “Strong leisure and business revenue trends continue in fourth quarter 2022, and we continue to expect strong profits and margins,” said Southwest management in the company’s investor presentation on Wednesday as it reaffirmed its fourth-quarter revenue guidance. 

As Southwest readies its first dividend since 2020, here’s a closer look at the company and its payout.

What Southwest management is saying

Southwest’s reasoning for bringing back its dividend is simple. Business is booming.

“Today’s announcement reflects the strong return in demand for air travel and the Company’s solid operating and financial results since March 2022,” said Southwest CEO Bob Jordan in a press release on Wednesday. “The reinstatement of our quarterly dividend also reflects our balance sheet strength and continued focus on generating consistently healthy earnings, margins, and long-term capital returns,” he added. 

The reinstated quarterly dividend of $0.18 will be paid to shareholders next month. This $0.18 dividend is equal to the quarterly dividend the company was paying to shareholders when it was suspended in 2020. 

A strong dividend history

It’s worth noting that it was unlike Southwest to suspend its dividend when it did so in 2020. But the sudden hit to the travel industry was unlike anything the airline industry had seen before.

A testament to the company’s ability to consistently reward shareholders with dividends before COVID-19, the company’s upcoming quarterly dividend will be Southwest’s 175th dividend paid to shareholders. Barring more major lockdowns like the ones that occurred in 2020, investors should expect consistent dividend payments in the years to come.

A meaningful dividend yield with growth potential

So, what will Southwest’s dividend yield be now that the company will be paying a dividend? Based on its stock price at the time of this writing, the airline stock now boasts a dividend yield of 1.9%. With a yield like this, the company isn’t wasting any time making itself a serious dividend stock.

Sure, a 1.9% dividend yield isn’t substantial. But it’s big enough to make a difference and to attract some dividend investors. Further, it’s not bad considering that the dividend is likely to grow in the coming years. After all, the company has a long history of serving investors dividend hikes. Between 2010 and 2020, Southwest’s dividend increased fourfold. While dividend growth this strong is unlikely in the years ahead, it wouldn’t be surprising to see modest annualized growth to the tune of 5% to 10% hikes.

Overall, Southwest’s reinstatement of its dividend is great news for investors. Not only does it give shareholders an income stream but it signals management’s confidence in the underlying business and the travel industry.

Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool recommends Southwest Airlines. The Motley Fool has a disclosure policy.

Read More: Southwest Is Bringing Its Dividend Back: What Investors Should Know

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