Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. However, when you're an income investor, your primary focus is generating consistent cash flow from each of your liquid investments.
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 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
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 13.07% since the start of the year. The equipment manufacturer for the transportation, power, food and construction industries is currently shelling out a dividend of $1 per share, with a dividend yield of 2.79%. This compares to the Manufacturing - General Industrial industry's yield of 0.82% and the S&P 500's yield of 1.93%.
In terms of dividend growth, the company's current annualized dividend of $4 is up 12.4% from last year. In the past five-year period, Illinois Tool Works has increased its dividend 5 times on a year-over-year basis for an average annual increase of 18.60%. 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. Right now, Illinois Tool Works's payout ratio is 53%, which means it paid out 53% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, ITW expects solid earnings growth. The Zacks Consensus Estimate for 2019 is $7.97 per share, with earnings expected to increase 4.87% from the year ago period.
From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. It's important to keep in mind that not all companies provide 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 have to be mindful 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).