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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.

While cash flow can come from bond interest or interest from other types of investments, income investors hone in on dividends. A dividend is a 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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.
 

Caterpillar in Focus

Based in Irving, Caterpillar (CAT - Free Report) is in the Industrial Products sector, and so far this year, shares have seen a price change of -0.7%. The construction equipment company is currently shelling out a dividend of $1.2 per share, with a dividend yield of 2.02%. This compares to the Manufacturing - Construction, and Mining industry's yield of 1.24% and the S&P 500's yield of 1.61%.

Taking a look at the company's dividend growth, its current annualized dividend of $4.80 is up 3.9% 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 8.71%. Looking ahead, future dividend growth will be dependent on earnings growth and payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Caterpillar's current payout ratio is 35%, meaning it paid out 35% of its trailing 12-month EPS as dividend.

Looking at this fiscal year, CAT expects solid earnings growth. The Zacks Consensus Estimate for 2023 is $15.61 per share, representing a year-over-year earnings growth rate of 12.79%.
 

Bottom Line

From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. But, not every company offers 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. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. 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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