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Why Illinois Tool Works (ITW) is a Top Dividend Stock for Your Portfolio

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Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. But for income investors, generating consistent cash flow from each of your liquid investments is your primary focus.

While cash flow can come from bond interest or interest from other types of investments, income investors hone in on 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.

Illinois Tool Works in Focus

Illinois Tool Works (ITW - Free Report) is headquartered in Glenview, and is in the Industrial Products sector. The stock has seen a price change of -17.95% since the start of the year. Currently paying a dividend of $1.22 per share, the company has a dividend yield of 2.41%. In comparison, the Manufacturing - General Industrial industry's yield is 0.09%, while the S&P 500's yield is 1.58%.

Looking at dividend growth, the company's current annualized dividend of $4.88 is up 3.4% from last year. Over the last 5 years, Illinois Tool Works has increased its dividend 5 times on a year-over-year basis for an average annual increase of 12.12%. 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. Illinois Tool Works's current payout ratio is 60%. This means it paid out 60% of its trailing 12-month EPS as dividend.

Looking at this fiscal year, ITW expects solid earnings growth. The Zacks Consensus Estimate for 2022 is $9.16 per share, representing a year-over-year earnings growth rate of 7.39%.

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. But, not every company offers 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, ITW 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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