Why Illinois Tool Works (ITW) is a Great Dividend Stock Right Now

Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. 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 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.

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 -16.39%. The equipment manufacturer for the transportation, power, food and construction industries is paying out a dividend of $1.22 per share at the moment, with a dividend yield of 2.37% compared to the Manufacturing - General Industrial industry's yield of 0.08% and the S&P 500's yield of 1.53%.

Taking a look at the company's dividend growth, its current annualized dividend of $4.88 is up 3.4% 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 12.12%. 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 60%, which means it paid out 60% of its trailing 12-month EPS as dividend.

Earnings growth looks solid for ITW for this fiscal year. The Zacks Consensus Estimate for 2022 is $9.16 per share, with earnings expected to increase 7.39% from the year ago period.

Bottom Line

From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. However, not all companies offer 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. 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).

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