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.

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

Caterpillar (CAT) is headquartered in Deerfield, and is in the Industrial Products sector. The stock has seen a price change of -4.46% since the start of the year. The construction equipment company is paying out a dividend of $1.2 per share at the moment, with a dividend yield of 2.43% compared to the Manufacturing - Construction and Mining industry's yield of 1.91% and the S&P 500's yield of 1.56%.

Looking at dividend growth, the company's current annualized dividend of $4.80 is up 12.1% from last year. Caterpillar has increased its dividend 4 times on a year-over-year basis over the last 5 years for an average annual increase of 8.90%. 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, Caterpillar's payout ratio is 39%, which means it paid out 39% of its trailing 12-month EPS as dividend.

Earnings growth looks solid for CAT for this fiscal year. The Zacks Consensus Estimate for 2022 is $12.69 per share, with earnings expected to increase 17.39% 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.

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. 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, 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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