This is Why Caterpillar (CAT) is a Great Dividend Stock

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.

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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.

Caterpillar in Focus

Headquartered in Deerfield, Caterpillar (CAT) is an Industrial Products stock that has seen a price change of 5.23% so far this year. The construction equipment company is currently shelling out a dividend of $0.86 per share, with a dividend yield of 2.57%. This compares to the Manufacturing - Construction and Mining industry's yield of 1.44% and the S&P 500's yield of 1.92%.

Looking at dividend growth, the company's 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 5%. 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.

Earnings growth looks solid for CAT for this fiscal year. The Zacks Consensus Estimate for 2019 is $12.25 per share, representing a year-over-year earnings growth rate of 9.18%.

Bottom Line

Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. But, not every company offers 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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