Caterpillar’s Dividend Hike Rewards Long-Term Investors

Caterpillar (NYSE:CAT) can’t catch a break when it comes to the economic outlook in the U.S. and abroad, so kudos to the board for taking action on something it can control — returning cash to shareholders.

The world’s biggest maker of heavy mining and construction equipment said Wednesday it’s hiking its dividend 13%. The company will start paying a quarterly dividend of 52 cents per share on Aug. 20 to shareholders of record as of July 20. That’s up 6 cents from the current quarterly dividend of 46 cents.

True, the payout hike doesn’t move the needle very much on the stock’s dividend yield. At the current share price, the higher dividend will equate to a forward yield of 2.44%, up from 2.16% today.

But that’s not the important point. You see, rising dividends always are good news for long-term income investors because they accrue handsomely to any shares bought at lower prices in the past.

For example, any CAT stock bought at its 52-week low of about $67 will now sport a yield of more than 3% on that initial cost basis. Going a bit further back, if you bought CAT at the nadir of the bear market in 2009, those shares now will have a whopping dividend yield of more than 8%.

That’s the secret of dividend investing — finding companies that have a long record of dependable and rising dividends, because shares bought ages ago can wind up throwing off tremendously generous yields in the future.

Caterpillar, for example, has paid a dividend every quarter since 1933, which means the income component of the holding has been a boon to investors’ portfolios. The importance of a steady income stream is why InvestorPlace maintains a list of Dependable Dividend Stocks, showcasing a wide range of rock-solid companies when it comes to preserving capital and making regular dividend payments.

The timing of the Caterpillar dividend is welcome news for other reasons. Headlines out of China, Brazil, India, Europe and the U.S. have been brutal on shares, even as the company’s long-range fundamentals remain sound.

Shares were up as much as 28% in 2012 before giving that all up and then some. The stock, a component of the Dow Jones Industrial Average, has now lost 6% year-to-date.

The slower global growth and weaker commodity prices driving the slide are out of management’s control. By hiking the dividend now, management not only is rewarding long-term investors, but it also could help stabilize the stock until things turn around in the second half.

A big part of my argument for CAT as one of InvestorPlace’s Ten Best Stocks for 2012 was that fear over a China slowdown already was more than baked into the stock. That still looks to be the case.

China’s stimulus, monetary easing on the part of Brazil and a pickup in the U.S. once we get through the doldrums of summer leave Caterpillar well-positioned to reap outsized benefits of a rebound. For its most recent quarter, the company logged record earnings and a record order backlog — and that was all in spite of a cooling global economy.

When some companies raise or initiate a dividend, it smacks of desperation — if not outright doom. Just look at Dell‘s (NASDAQ:DELL) spanking-new dividend if you want to see what it looks like when a stock jumps the shark.

But when a dependable dividend payer like Caterpillar hikes payouts amid a share slide … well, that’s just shrewd strategic management.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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