All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. But when you're an income investor, your primary focus is generating consistent cash flow from each of your liquid investments.
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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.
Caterpillar in Focus
Headquartered in Deerfield, Caterpillar (CAT - Free Report) is an Industrial Products stock that has seen a price change of -2.05% so far this year. The construction equipment company is paying out a dividend of $0.86 per share at the moment, with a dividend yield of 2.76% compared to the Manufacturing - Construction and Mining industry's yield of 1.5% and the S&P 500's yield of 1.96%.
Looking at dividend growth, the company's current annualized dividend of $3.44 is up 4.9% from last year. Caterpillar has increased its dividend 4 times on a year-over-year basis over the last 5 years for an average annual increase of 5%. 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. Caterpillar's current payout ratio is 30%. This means it paid out 30% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, CAT expects solid earnings growth. The Zacks Consensus Estimate for 2019 is $12.25 per share, which represents a year-over-year growth rate of 9.18%.
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.
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, CAT 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).