Dividend investing often appeals to those seeking a steady passive income stream from their portfolio, but not all high-yielding stocks are created equal. A common pitfall is chasing a double-digit yield only to find the company’s financial health is deteriorating. To avoid that trap, a solid screening strategy focuses on companies that combine strong dividend credentials with strong profitability and a healthy balance sheet. Using a dedicated “Best Dividend Stocks” screen, we filter for stocks with a ChartMill Dividend Rating of at least 7 out of 10, while also requiring minimum scores of 5 for both Profitability and Health ratings, along with average daily volume above 500,000 and a price above $10. This approach helps ensure that the dividend is not only attractive but also sustainable.
The screen recently highlighted Illinois Tool Works (NYSE:ITW), which earns an overall fundamental rating of 6 out of 10 based on its detailed fundamental report. ITW is a diversified industrial manufacturer with segments spanning automotive components, food equipment, welding, and construction products. Its inclusion in the screen is driven by the strength and reliability of its dividend, supported by excellent profitability and a decent, though not flawless, financial health profile.
Dividend Strengths
The core of the screening criteria is the dividend rating, and ITW scores an impressive 8 out of 10 in this category. This high score is built on several positive factors:
- Decent Yield: ITW offers a yearly dividend yield of 2.42% . While this may not be the highest headline number, it is significantly better than the industry average of 1.08% and also surpasses the broader S&P 500 average of 1.81%, placing it in the top tier of its sector.
- Solid Growth & History: The company has been paying and increasing its dividend for over a decade, with a five-year annual growth rate of 7.19% . A consistent history of dividend increases is a strong indicator of management’s commitment to returning value to shareholders.
- Sustainable Payout: The current payout ratio stands at 58.22% of earnings. Although this is slightly on the higher side, it is not alarming. Crucially, earnings are growing faster than the dividend, which reinforces the likelihood that future increases will remain sustainable.
Profitability and Health: The Supporting Pillars
A high dividend is only meaningful if the company can consistently afford to pay it. ITW’s financial performance provides that reassurance.
Profitability (Rating: 9/10): ITW delivers outstanding profitability, which is a key reason its dividend is considered safe. Key metrics include:
- Return on Equity (ROE): 95.07% — outperforming 100% of its industry peers.
- Return on Invested Capital (ROIC): 26.75% — also among the best in its industry.
- Profit Margin: 19.11% — placing it well above 95% of comparable machinery companies.
These figures demonstrate that ITW is exceptionally efficient at generating profits from its capital base, providing a wide buffer to maintain its dividend payments.
Financial Health (Rating: 5/10): This is the one area that is more cautious. ITW’s health rating is average, which is acceptable for our screening threshold. The main concerns are:
- Debt-to-Equity Ratio: At 2.47, this is high, indicating a reliance on debt financing.
- Liquidity Concerns: Its Current Ratio of 1.21 and Quick Ratio of 0.89 are below many industry peers, suggesting potential short-term liquidity pressure.
These factors do not mean the company is in immediate danger. The Altman-Z score is a strong 8.12, signaling very low bankruptcy risk. However, investors should be aware that the balance sheet is leveraged. In a rising interest rate environment or a sharp economic downturn, this debt load could put pressure on free cash flow and, by extension, future dividend growth. This is a consideration that a dividend-focused investor should monitor.
Valuation and Growth Context
ITW’s valuation is currently expensive, with a Price-to-Earnings (P/E) ratio of 25.46. However, this premium is partially justified by its outstanding profitability rating. Earnings per share have grown at an average of 9.61% per year over the past five years, and analysts project future annual EPS growth of 8.86% . This stable growth profile supports the company’s ability to continue raising its payout.
Analyst and Screening Conclusion
For a dividend investor, ITW offers a well-rounded package: a solid and growing yield from a company that ranks at the very top for profitability. While the mediocre health rating warrants caution, the high dividend rating and strong profitability make ITW a convincing candidate for those seeking reliable income. This illustrates why the screening method—demanding a high dividend score while not ignoring profitability—can help separate durable dividend payers from risky ones.
If you are interested in finding more stocks with similar dividend potential, you can run the same Best Dividend Stocks Screener yourself. It is fully configurable, allowing you to tighten the health requirements or add other criteria like market cap. Check out the full list of results from this screen to see which other companies meet the criteria.
Disclaimer: This article is for informational and educational purposes only and does not constitute investment advice. Always conduct your own research and consider your financial situation before making any investment decisions.