Caterpillar (NYSE:CAT) has been a conundrum for investors over the past couple of years. On one hand, the company's stock price has essentially gone nowhere since the end of 2017, as the heavy equipment specialist has had to deal with sluggish macroeconomic conditions around the world that have eaten into its potential for growth. Moreover, with commodity prices in key areas like energy weighing on some of its target markets, Caterpillar hasn't had a great industry environment in which to try to restart its growth engines.

From a dividend standpoint, though, Caterpillar has never looked stronger. With more than a quarter century of annual dividend increases and hefty hikes recently, shareholders are getting spoiled by the industrial company. Going into 2020, some wonder if the party will have to end at some point. Here, we'll look more closely at Caterpillar's dividend strength and whether it will continue.

Dividend stats on Caterpillar

Metric

Stat

Current quarterly dividend per share

$1.03

Current yield

2.9%

Number of consecutive years with dividend increases

26 years

Payout ratio

39%

Last increase

July 2019

Data source: Yahoo! Finance. Last increase refers to ex-dividend date.

A catch-up year for Caterpillar's dividend

Caterpillar's dividend history reflects the cyclical nature of its business. You can clearly see from the size of the increases it makes each year where in the cycle Caterpillar happens to be. For instance, during 2008 and 2009, the heavy equipment company made just a single dividend increase, but because it did so mid-year, the total amount of dividends paid during 2009 was higher than in 2008, keeping the streak alive. Subsequently, Caterpillar limited itself to modest dividend increases in 2010 and 2011.

During better times, Caterpillar has been more aggressive in cementing its reputation as a growing dividend stock. For instance, in 2012, Caterpillar hiked its payout by 13%, and subsequent increases followed in the 10% to 15% range through 2015. Then, 2016 and 2017 saw minimal increases again, followed by a 10% boost in 2018 and a massive 20% raise in 2019.

CAT Dividend Chart

CAT Dividend data by YCharts.

The huge fluctuations in Caterpillar's earnings make it possible for the company to reward shareholders with big dividend increases during good times. The best example is right now, as even after a couple of large-sized hikes to the payout, Caterpillar is only paying about 40% of its earnings as dividends. Yet during down times in the cycle, payout ratios can soar to 200% or more.

Will Caterpillar boost its dividend in 2020?

The problem for Caterpillar right now is that many people expect that another downward stretch for earnings could be coming. In its latest quarterly report, the equipment manufacturer reduced its full-year earnings guidance substantially, calling into question prospects for 2020. If headwinds weigh on net income, then it would make it far harder for Caterpillar to give investors anything more than the token boosts it has historically delivered during tough times.

Caterpillar tractor as seen from front, with some sand in front.

Image source: Caterpillar.

Yet CEO Jim Umpleby has specifically stated that he expects Caterpillar to keep boosting its dividend payout by high single-digit percentages. That certainly suggests that investors shouldn't expect a repeat of its 2019 raise, but a raise to $1.10 per share quarterly -- or roughly 7% -- would be consistent with what the company's saying.

Caterpillar surprised investors with the size of its 2019 dividend increase, but payout growth should return to more sustainable levels in 2020. It'd take a big disruption to its business for Caterpillar to resort to a pause in hiking its dividend throughout the coming year.