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 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 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 Irving, Caterpillar (CAT) is an Industrial Products stock that has seen a price change of -8.67% so far this year. Currently paying a dividend of $1.2 per share, the company has a dividend yield of 2.19%. In comparison, the Manufacturing - Construction and Mining industry's yield is 1.3%, while the S&P 500's yield is 1.72%.
Looking at dividend growth, the company's current annualized dividend of $4.80 is up 3.9% from last year. In the past five-year period, Caterpillar has increased its dividend 4 times on a year-over-year basis for an average annual increase of 8.19%. 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. Caterpillar's current payout ratio is 30%, meaning it paid out 30% of its trailing 12-month EPS as dividend.
CAT is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2023 is $15.93 per share, with earnings expected to increase 15.10% 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. 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. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. 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).
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