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 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) is an Industrial Products stock that has seen a price change of 5.42% 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 2.57% compared to the Manufacturing – Construction and Mining industry’s yield of 1.51% and the S&P 500’s yield of 1.88%.
Taking a look at the company’s dividend growth, its current annualized dividend of $3.44 is up 4.9% from last year. Over the last 5 years, Caterpillar has increased its dividend 4 times on a year-over-year basis for an average annual increase of 4.17%. 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%. This means 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 2019 is $12.23 per share, which represents a year-over-year growth rate of 9%.
Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. However, not all companies offer 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. Income investors must be conscious 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).
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Caterpillar Inc. (CAT) : Free Stock Analysis Report
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