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Why Caterpillar (CAT) is a Top Dividend Stock for Your Portfolio

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

Caterpillar in Focus

Based in Deerfield, Caterpillar (CAT) is in the Industrial Products sector, and so far this year, shares have seen a price change of 4.6%. Currently paying a dividend of $1.03 per share, the company has a dividend yield of 3.1%. In comparison, the Manufacturing - Construction and Mining industry's yield is 1.43%, while the S&P 500's yield is 1.87%.

In terms of dividend growth, the company's current annualized dividend of $4.12 is up 25.6% 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 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.

Looking at this fiscal year, CAT expects solid earnings growth. The Zacks Consensus Estimate for 2019 is $11.79 per share, representing a year-over-year earnings growth rate of 5.08%.

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. 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. 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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