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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. But 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 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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.
Cummins in Focus
Based in Columbus, Cummins (CMI) is in the Auto-Tires-Trucks sector, and so far this year, shares have seen a price change of -20.86%. The engine maker is paying out a dividend of $1.08 per share at the moment, with a dividend yield of 3.09% compared to the Automotive - Internal Combustion Engines industry's yield of 1.55% and the S&P 500's yield of 1.77%.
Looking at dividend growth, the company's current annualized dividend of $4.32 is up 2.6% 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 14.06%. Future dividend growth will depend on earnings growth as well as payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Right now, Cummins's payout ratio is 37%, which means it paid out 37% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, CMI expects solid earnings growth. The Zacks Consensus Estimate for 2018 is $13.19 per share, which represents a year-over-year growth rate of 24.20%.
Bottom Line
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.
High-growth firms or tech start-ups, for example, rarely provide their shareholders a dividend, while larger, more established companies that have more secure profits are often seen as the best dividend options. Income investors must be conscious of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, CMI presents a compelling investment opportunity; it's not only an attractive dividend play, but the stock also boasts a strong Zacks Rank of #2 (Buy).
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