Why Illinois Tool Works (ITW) 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.

Illinois Tool Works in Focus

Headquartered in Glenview, Illinois Tool Works (ITW) is an Industrial Products stock that has seen a price change of -6.64% so far this year. Currently paying a dividend of $1.07 per share, the company has a dividend yield of 2.55%. In comparison, the Manufacturing - General Industrial industry's yield is 0.58%, while the S&P 500's yield is 2.04%.

Taking a look at the company's dividend growth, its current annualized dividend of $4.28 is up 3.4% from last year. In the past five-year period, Illinois Tool Works has increased its dividend 5 times on a year-over-year basis for an average annual increase of 19.81%. 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. Right now, Illinois Tool Works's payout ratio is 55%, which means it paid out 55% 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 $7.88 per share, with earnings expected to increase 1.68% 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. It's important to keep in mind that not all companies provide a quarterly payout.

Big, established firms that have more secure profits are often seen as the best dividend options, but it's fairly uncommon to see high-growth businesses or tech start-ups offer their stockholders a dividend. 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, 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).

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