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 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
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 12.58% since the start of the year. Currently paying a dividend of $1 per share, the company has a dividend yield of 2.8%. In comparison, the Manufacturing - General Industrial industry's yield is 0.56%, while the S&P 500's yield is 1.98%.
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%. 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 53%, meaning 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 $7.96 per share, representing a year-over-year earnings growth rate of 4.74%.
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. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. 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).