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All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. However, when you're an income investor, your primary focus is generating consistent cash flow from each of your liquid investments.
Cash flow can come from bond interest, interest from other types of investments, and of course, dividends. A dividend is the distribution of a company's earnings paid out to shareholders; it's often viewed by its dividend yield, a metric that measures a 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
Cummins (CMI) is headquartered in Columbus, and is in the Auto-Tires-Trucks sector. The stock has seen a price change of 0.54% since the start of the year. Currently paying a dividend of $1.45 per share, the company has a dividend yield of 2.54%. In comparison, the Automotive - Internal Combustion Engines industry's yield is 1.23%, while the S&P 500's yield is 1.41%.
Looking at dividend growth, the company's current annualized dividend of $5.80 is up 9.8% from last year. In the past five-year period, Cummins has increased its dividend 5 times on a year-over-year basis for an average annual increase of 7.31%. Looking ahead, future dividend growth will be dependent on earnings growth and payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Cummins's current payout ratio is 36%, meaning it paid out 36% of its trailing 12-month EPS as dividend.
Earnings growth looks solid for CMI for this fiscal year. The Zacks Consensus Estimate for 2021 is $16.37 per share, with earnings expected to increase 36.30% from the year ago period.
From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. 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 have to be mindful of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, CMI is a compelling investment opportunity. Not only is it a strong dividend play, but the stock currently sits at a Zacks Rank of 3 (Hold).
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Cummins Inc. (CMI) : Free Stock Analysis Report
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