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Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. But for income investors, generating consistent cash flow from each of your liquid investments is your primary focus.
While cash flow can come from bond interest or interest from other types of investments, income investors hone in on dividends. A dividend is that coveted distribution of a company's earnings paid out to shareholders, and investors often view it by its dividend yield, a metric that measures the dividend as a percent of the current stock price. Many academic studies show that dividends make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.
Cummins in Focus
Headquartered in Columbus, Cummins (CMI) is an Auto-Tires-Trucks stock that has seen a price change of 15.78% so far this year. Currently paying a dividend of $1.35 per share, the company has a dividend yield of 2.05%. In comparison, the Automotive - Internal Combustion Engines industry's yield is 0.75%, while the S&P 500's yield is 1.3%.
Taking a look at the company's dividend growth, its current annualized dividend of $5.40 is up 2.2% from last year. Cummins has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 7.48%. Any future dividend growth will depend on both earnings growth and the company's payout ratio; a payout ratio is the proportion of a firm's annual earnings per share that it pays out as a dividend. Cummins's current payout ratio is 42%. This means it paid out 42% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, CMI expects solid earnings growth. The Zacks Consensus Estimate for 2021 is $15.57 per share, representing a year-over-year earnings growth rate of 29.64%.
Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. However, not all companies offer a quarterly payout.
For instance, it's a rare occurrence when a tech start-up or big growth business offers their shareholders a dividend. It's more common to see larger companies with more established profits give out dividends. Income investors must be conscious of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. That said, they can take comfort from the fact that CMI is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).
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Cummins Inc. (CMI) : Free Stock Analysis Report
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