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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.

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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.

Illinois Tool Works in Focus

Headquartered in Glenview, Illinois Tool Works (ITW - Free Report) is an Industrial Products stock that has seen a price change of 4.54% so far this year. The equipment manufacturer for the transportation, power, food and construction industries is paying out a dividend of $1.4 per share at the moment, with a dividend yield of 2.43% compared to the Manufacturing - General Industrial industry's yield of 0.06% and the S&P 500's yield of 1.71%.

In terms of dividend growth, the company's current annualized dividend of $5.60 is up 10.7% 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 6.67%. Future dividend growth will depend on earnings growth as well as payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Right now, Illinois Tool Works's payout ratio is 56%, which means it paid out 56% of its trailing 12-month EPS as dividend.

Earnings growth looks solid for ITW for this fiscal year. The Zacks Consensus Estimate for 2023 is $9.76 per share, which represents a year-over-year growth rate of 6.43%.

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.

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. 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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