Should You Trust This Dow Dividend?

Heavy-machinery builder Caterpillar (NYS: CAT) sports a dividend yield of 2.5%. The payout per share was recently boosted by 13%, and the company has more than two decades of consistent dividends in the rearview mirror, not once having reduced its payout per split-adjusted share. Caterpillar is a well-respected business with four stars out of five in our CAPS system, and it's the purest infrastructure play on the Dow Jones Industrial Average (INDEX: ^DJI) .

How much bluer can a chip really get? Caterpillar is an income investor's best friend:

CAT Dividend Chart
CAT Dividend Chart

CAT Dividend data by YCharts. Shaded areas outline economic recessions.

Or is it?

Caterpillar may be happy to share its wealth with investors, but there's less wealth available to share than there used to be. Have a look at this crazy chart and see if it changes your mind about Caterpillar's dividend superiority:

CAT Free Cash Flow TTM Chart
CAT Free Cash Flow TTM Chart

CAT Free Cash Flow TTM data by YCharts.

You can see Caterpillar's free cash flows seesawing wildly, with a drastic plunge in 2012 -- right alongside the drastic payout boost we saw in the previous chart.

As a result, Caterpillar's once-comfortable cash payout ratio has soared from less than 30% to more than 80% in a matter of months.

That's scary if your retirement portfolio was built around Caterpillar's rock-steady payouts. What if the company can't support this generous policy with current cash flows? With large payout ratios like these, you start to wonder whether Caterpillar might need to slash its dividend or dip into cash reserves to fund it sometime soon.

But let me show you another interesting chart before you panic and dive on that red "sell" button:

KO Cash Div. Payout Ratio TTM Chart
KO Cash Div. Payout Ratio TTM Chart

KO Cash Div. Payout Ratio TTM data by YCharts.

Fellow Dow members Coke and Pfizer have also reached lofty cash-payout ratios in recent years. But they also reversed course and returned to solid ground again, and both did it by getting their derailed cash flows back on track.

That's why these companies are blue chips and Dow components, after all. Coke and Pfizer know how to take a licking and keep on ticking. Will Caterpillar bounce back the same way?

We've created a special report to help you figure that out.

Caterpillar is the market share leader in an industry in which size matters, and its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. Read all about Caterpillar's strengths and weaknesses in our brand-new report, which comes with a year of updates. Just click here to access it now.

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