This Is Why Illinois Tool Works (ITW) Is A Great Dividend Stock

Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. However, when you're an income investor, your primary focus is generating consistent cash flow from each of your liquid investments.

Cash flow can come from bond interest, interest from other types of investments, and of course, 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.

Illinois Tool Works in Focus

Headquartered in Glenview, Illinois Tool Works (ITW) is an Industrial Products stock that has seen a price change of -2.59% so far this year. The equipment manufacturer for the transportation, power, food and construction industries is paying out a dividend of $1.07 per share at the moment, with a dividend yield of 2.45% compared to the Manufacturing - General Industrial industry's yield of 0.68% and the S&P 500's yield of 1.81%.

Taking a look at the company's dividend growth, its current annualized dividend of $4.28 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 19.81%. Future dividend growth will depend on earnings growth as well as payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Right now, Illinois Tool Works's payout ratio is 56%, which means it paid out 56% of its trailing 12-month EPS as dividend.

Looking at this fiscal year, ITW expects solid earnings growth. The Zacks Consensus Estimate for 2020 is $7.91 per share, representing a year-over-year earnings growth rate of 2.06%.

Bottom Line

Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. 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. 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).