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UPDATE 2-Caterpillar hikes dividend, gives details on services push

(Adds details and background on services revenue; share price)

May 2 (Reuters) - Caterpillar Inc will issue a record dividend for the second quarter, up 20 percent from its previous payout, and plans to further increase returns to shareholders over the next four years, the company said on Thursday ahead of its investor day presentation.

The heavy machinery maker also gave details that showed the scope of its plan to smooth out volatility in its earnings by selling more parts and services, saying that it intends to grow annual services revenue to $28 billion by 2026, up from $18 billion in 2018 and double what it was in 2016.

Caterpillar's main customers are in businesses like mining and construction, which are prone to wide swings with the business cycle.

The Deerfield, Illinois-based company said last week that it now has about 850,000 of its machines tied to the cloud, which allows close monitoring of systems as part of its service offerings. New Caterpillar machines are dotted with sensors that can warn when parts are about to fail.

The services business, spread across the company's construction, resource and energy & transportation units, contributed about 33 percent to Caterpillar's overall $54.7 billion revenue in 2018.

Caterpillar shares were down 1.4 percent in morning trading.

Last week, Caterpillar spooked investors when it reported first-quarter results that showed rising costs hitting margins in its construction equipment business and weak sales in the Asia-Pacific region linked to slow growth in China.

Caterpillar has raised prices to offset some of the higher costs and pushed efficiency moves at its far-flung network of factories.

The company now has a target for adjusted operating margins of 3 to 6 percentage points above historical performance from 2010 to 2016.

The dividend of $1.03 per share will be paid on Aug. 20 to shareholders at the close of business on July 22, Caterpillar said.

The company is targeting at least high single-digit dividend increases in each of the next four years and plans to buy back shares more consistently.

"Caterpillar is now a stronger and more profitable company that can produce higher free cash flow through the cycles," Chief Executive Jim Umpleby said in a statement. (Reporting by Rachit Vats in Bengaluru and Timothy Aeppel in New York; Writing by Meredith Mazzilli; Editing by Saumyadeb Chakrabarty, Shinjini Ganguli and Jonathan Oatis)