All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. 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 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 11.1% 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 2.84%. This compares to the Manufacturing - General Industrial industry's yield of 0.57% and the S&P 500's yield of 1.97%.
In terms of dividend growth, the company's current annualized dividend of $4 is up 12.4% from last year. Illinois Tool Works has increased its dividend 5 times on a year-over-year basis over the last 5 years 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.
Earnings growth looks solid for ITW for this fiscal year. The Zacks Consensus Estimate for 2019 is $7.97 per share, representing a year-over-year earnings growth rate of 4.81%.
Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. It's important to keep in mind that not all companies provide a quarterly payout.
For instance, it's a rare occurrence when a tech start-up or big growth business offers their shareholders a dividend. It's more common to see larger companies with more established profits give out dividends. 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).