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 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.
Caterpillar in Focus
Caterpillar (CAT - Free Report) is headquartered in Deerfield, and is in the Industrial Products sector. The stock has seen a price change of -11.75% since the start of the year. Currently paying a dividend of $0.86 per share, the company has a dividend yield of 2.47%. In comparison, the Manufacturing - Construction and Mining industry's yield is 1.04%, while the S&P 500's yield is 1.78%.
In terms of dividend growth, the company's current annualized dividend of $3.44 is up 11% from last year. Over the last 5 years, Caterpillar has increased its dividend 4 times on a year-over-year basis for an average annual increase of 6.15%. 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. Right now, Caterpillar's payout ratio is 32%, which means it paid out 32% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, CAT expects solid earnings growth. The Zacks Consensus Estimate for 2018 is $11.54 per share, which represents a year-over-year growth rate of 67.73%.
Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. However, not all companies offer 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. That said, they can take comfort from the fact that CAT is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #2 (Buy).