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Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. But 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 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.

Illinois Tool Works in Focus

Headquartered in Glenview, Illinois Tool Works (ITW) is an Industrial Products stock that has seen a price change of -8.3% so far this year. The equipment manufacturer for the transportation, power, food and construction industries is currently shelling out a dividend of $1.4 per share, with a dividend yield of 2.33%. This compares to the Manufacturing - General Industrial industry's yield of 0.26% and the S&P 500's yield of 1.57%.

In terms of dividend growth, the company's current annualized dividend of $5.60 is up 3.3% 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 6.73%. 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. Illinois Tool Works's current payout ratio is 57%. This means it paid out 57% of its trailing 12-month EPS as dividend.

Earnings growth looks solid for ITW for this fiscal year. The Zacks Consensus Estimate for 2024 is $10.19 per share, with earnings expected to increase 4.19% from the year ago period.

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, 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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Illinois Tool Works Inc. (ITW) : Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.