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 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
Based in Glenview, Illinois Tool Works (ITW) is in the Industrial Products sector, and so far this year, shares have seen a price change of 6.11%. 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 2.98%. This compares to the Manufacturing – General Industrial industry’s yield of 0.33% and the S&P 500’s yield of 1.97%.
Taking a look at the company’s dividend growth, its current annualized dividend of $4 is up 12.4% from last year. Over the last 5 years, Illinois Tool Works has increased its dividend 5 times on a year-over-year basis 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. Right now, Illinois Tool Works’s payout ratio is 54%, which means it paid out 54% of its trailing 12-month EPS as dividend.
ITW is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2019 is $8.06 per share, with earnings expected to increase 6.05% from the year ago period.
Bottom Line
Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. But, not every company offers 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).
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