All investors, whether they invest in stocks, bonds, ETFs, or other securities, adore receiving high returns on their portfolio. For income investors, however, the main goal is to consistently produce cash flow from all of your liquid investments.
Bond interest, interest from other sorts of investments, and dividends are all possible sources of cash flow. Investors sometimes judge a dividend by its dividend yield, a metric that expresses the dividend as a percentage of the stock price at the time it is being considered. A dividend is that coveted distribution of a company’s earnings paid out to shareholders. Numerous academic studies have demonstrated that dividends contribute significantly to long-term returns, often contributing more than one-third of total returns.
Caterpillar (CAT), an Industrial Products stock with its main office in Irving, has experienced a price change of -8.67% so far this year. The company has a dividend yield of 2.19% and is now paying a dividend of $1.2 per share. The yield for the Manufacturing, Construction, and Mining sector is 1.3%, while the yield for the S&P 500 is 1.72%.
The company’s current yearly payout of $4.80 is up 3.9% from previous year when it comes to dividend growth. Caterpillar has raised its dividend four times in the last five years on an annual basis, for an average yearly rise of 8.19%. Any future dividend growth will be based on the company’s payout ratio, which is the percentage of annual earnings per share that is distributed as dividends.
Investors like dividends for a variety of reasons, including the substantial improvement in stock investment returns, the reduction in overall portfolio risk, and the provision of tax advantages. However, not all businesses provide a payout every quarter.
It’s normal to think of large, well-established companies with stable profits as the greatest dividend choices, but it’s not all that common for high-growth companies or tech start-ups to distribute dividends to their shareholders. Income investors must be aware that high-yielding stocks typically struggle when interest rates are rising. In light of this, CAT presents an appealing investment opportunity.
One of the longest runs of consecutive annual dividend increases on the stock market belongs to Procter & Gamble (PG 0.12%). It is clear from the company’s track record if it will announce another hike in April each year.
However, the size of the increase is frequently a surprise, and at roughly the same time, management provides an update to shareholders on its outlook for short-term growth. Here are some potential implications of the business’ April updates for shareholders and would-be purchasers of the dividend stock.
The next quarterly dividend payment from P&G will be $0.94 per share, and the company’s streak of continuous annual increases now stands at 67 years. P&G paid dividends prior to that streak as well; the company has been doing so on a regular basis since 1890.
The gain this year may have left investors unimpressed. After all, the increase from last year was just 5%, and sales trends are still strong, with organic sales increasing by 7% in the most recent quarter.
However, among other things, P&G’s earnings are being hampered by inflation and changes in currency exchange rates. Executives predict that these two problems will cause a $3.5 billion decline in profits in the company’s fiscal 2023 (which ends on June 30). The 3% dividend increase appears more generous when seen in the light of the fiscal year’s anticipated flat earnings.
There are further motivating factors to favor the stock. P&G increased average prices by 10% last quarter, showcasing its pricing prowess. True, that contributed to lower sales volumes. However, the company’s overall organic sales trends are positive, and management recently raised the growth outlook through 2023. CEO Jon Moeller stated, “We delivered strong results,” in the press statement for the fiscal third quarter, which was released in mid-April.
The fact that the company’s operational profit margin has stabilized has Wall Street even more ecstatic. Due to a mix of price hikes, cost reductions, and modest drops in some raw material prices, this main financial statistic, which had been declining for the majority of the previous year, slightly increased in fiscal Q3. P&G’s 21% margin continues to be far superior to competitors like Kimberly-Clark (KMB 0.66%).
It’s simple to see how exceptional annual earnings over the next few years could be driven by growing margins and promising sales patterns. Considering P&G’s sizable global customer base, emphasis on consumer staples, and sound financial position, an investment in the company doesn’t pose much of a risk during a recession. Dividend payments that are steadily increasing will also protect shareholders’ returns in the case of a stock market decline.
The stock isn’t inexpensive, which is a drawback. P&G stock is currently valued at just under 5 times annual sales, which is not far below the epidemic highs. Shares of Kimberly Clark are available for around half that price.
But given its dominant position in the industry and the high likelihood that its earnings will grow at a healthy clip over the coming years, P&G deserves to be valued higher. Investors should think about adding this stock to their portfolios given the alluring balance between risk and possible return. The financial benefits of doing so just became a little more tangible with a larger dividend payout on the way.
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