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Cummins (CMI) is a Top Dividend Stock Right Now: Should You Buy?

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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 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

Headquartered in Columbus, Cummins (CMI - Free Report) is an Auto-Tires-Trucks stock that has seen a price change of 13.29% so far this year. The engine maker is currently shelling out a dividend of $1.35 per share, with a dividend yield of 2.1%. This compares to the Automotive - Internal Combustion Engines industry's yield of 0.71% and the S&P 500's yield of 1.29%.

In terms of dividend growth, the company's current annualized dividend of $5.40 is up 2.2% 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 7.48%. 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. Cummins's current payout ratio is 42%. This means it paid out 42% of its trailing 12-month EPS as dividend.

CMI is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2021 is $15.96 per share, which represents a year-over-year growth rate of 32.89%.

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. It's important to keep in mind that not all companies provide a quarterly payout.

Big, established firms that have more secure profits are often seen as the best dividend options, but it's fairly uncommon to see high-growth businesses or tech start-ups offer their stockholders a dividend. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. 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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